What's The Deal?

“I said to myself, this is a Gold mine.”
-Steve Schwarzman

While Schwarzman’s Blackstone hasn’t made a habit of gobbling up Gold mines over the years, that’s what he said to himself after KKR’s pioneering leverage buyout in 1978. 

“In October of 1978, little known investment firm, Kohlberg Kravis Roberts, struck an agreement to buy Houdaille Industries, an industrial pumps maker, in a $380 million leveraged buyout.” -King of Capital, pg 12

If you haven’t read King of Capital, you should. It’s a lot more than a bio about Steve Schwarzman. It’s a history book about Private Equity and about cycles. While PE can be a great business, when it times The Cycle wrong it can go bad in a hurry.

Back to the Global Macro Grind…

Deals, “deals”, and “no deal”… what could possibly go wrong at this stage of the #EarningsSlowing cycle? Welcome to Macro Monday @Hedgeye where we’ll focus on measuring and mapping anything that has an economic and market time-series.

Let’s start with what happened in the Global Currency market last week:

1. US Dollar Index corrected -0.3% last week to +3.2% year-over-year and remains Bullish TREND @Hedgeye  
2. EUR/USD bounced +0.4% last week to -4.6% year-over-year and remains Bearish TREND @Hedgeye 
3. Yen was +1.0% vs. USD last week to +6.6% year-over-year and remains Neutral TREND @Hedgeye  
4. GBP/USD bounced +0.3% last week to -5.3% year-over-year and remains Bearish TREND @Hedgeye  
5. Chinese Yuan was down another -0.4% vs. USD last week to -3.9% year-over-year and remains Bearish TREND @Hedgeye 

As anyone who is bean counting the made-up Chinese economic data knows, they need to make up better data. After 6 “rate cuts” of their RRR, almost every ROC (rate of change) time-series that matters in China is on its cycle lows.

That means that if you started a “China” Private Equity fund at the 2017 peak of the Chinese economic cycle, that is not good.

What’s also been #NotGood (for the last YEAR now) is NOT making a major Asset Allocation shift away from speculative PE and Credit and into a calm pool of low-beta minimum vol US Treasuries:

1. High Yield OAS Spread WIDENED another +43 basis points last week to 4.20% and +104 basis points year-over-year
2. UST 2yr Yield collapsed by -23 basis points last week to 1.40% and -146 basis points year-over-year
3. UST 10yr Yield dropped another -15 basis points last week to 1.53% and -166 basis points year-over-year

As anyone who is a student of economic and market cycles knows, when The Cycle starts to slow, the most LEVERED and PRO-CYCLICAL “investments” get hit hardest first. Then the rest follows… and the Old Wall starts begging the Fed for a bailout.

Obviously most of the “private” stuff isn’t marked-to-market and seeing real-time price discovery, but even from a liquid public equity market Factor Exposure perspective, where NOT to be at this point in The Cycle was very obvious (again) last week:

1. HIGH DEBT (to EV) dropped another -1.8% on the week and is -3.0% in the last 3 months
2. HIGH BETA was down another -2.7% last week and is down -8.9% in the last 3 months
3. SMALL CAP was down another -2.3% last week and is down -7.5% in the last 3 months

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies

To be clear, if you bought a bunch of both private and public assets that are RATE SENSITVE 1-year ago today (like US Housing), you’re crushing it… and can look forward to more private and public crushing if the Fed starts cutting rates more aggressively:

A) REITS (VNQ) were up another +0.4% last week to +19.4% year-over-year and remain Bullish TREND @Hedgeye  
B) Utilities (XLU) were +0.1% last week (vs. Russell -1.3%) to +22.6% year-over-year and remain Bullish TREND @Hedgeye 
C) Gold was up another +0.4% last week to +22.3% year-over-year and remains Bullish TREND @Hedgeye  

Now that’s been a “gold mine” of an asset allocation from The Peak Cycle turn in Q3 of 2018!

Another place NOT to have had your hard earned capital in the last 12 months has been in International and/or Emerging Market public equities:

1. Emerging Markets (MSCI) Equities were down another -0.9% last week to -1.8% year-over-year
2. Japanese Equities (Nikkei) were down another -2.1% last week to -10.7% year-over-year
3. Spanish Equities (IBEX) were down another -2.4% last week to -3.8% year-over-year

With German Factory Orders still in #recession this morning (DAX down another -3.0% last week), there will surely be some “cheap” assets that get cheaper for both private and public equity investors as markets price in #FullCycleInvesting reality.

Our team’s goal will be to help both our private and public (equity and credit) market clients alike invest and re-allocate their assets counter-cyclically all the while. Our catalyst won’t be “valuation.” It will be data driven and slope-centric, indeed.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:

UST 10yr Yield 1.48-1.67% (bearish)
UST 2yr Yield 1.34-1.59% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 63.35-65.31 (bullish)
REITS (VNQ) 91.72-93.97 (bullish)
Nikkei 210 (bearish)
DAX 113 (bearish)
VIX 14.50-21.49 (bullish)
USD 97.95-99.31 (bullish)
EUR/USD 1.08-1.10 (bearish)
USD/YEN 106.35-108.39 (neutral)
GBP/USD 1.22-1.24 (bearish)
Oil (WTI) 51.01-57.20 (bearish)
Gold 1 (bullish)
Copper 2.52-2.62 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer