“Chase your passion, not your pension.”
-Dennis Waitley
The markup into the close into last week’s end was professional and impressive. I’m talking SPYs obviously. Suffice to say that, after crashing in Q4 of 2018, it’s had an impressive “year-to-date!”
As anyone who attempted to risk manage prior cycle all-time closing SPY highs knows, it is always unbelievably impressive to see our profession being forced into chasing a benchmark return. The fact of the matter is that’s how many people get paid.
Per Bloomberg, only 29% of active money managers are currently “beating their bench” at this point in the game. That’s down from 41% in Q3 and explains mostly why we’re seeing an epic net SHORT position build in the VIX. Hedge funds are forced to get net longer up here too.
Back to the Global Macro Grind…
It’s Macro Monday @Hedgeye. Welcome back and a good Veteran’s Day to our bravest. Those who served and sacrificed before you are some of the most impressive human beings of us all.
Let’s get right into it and start with what happened in the Global Currency market last week:
- US Dollar Index bounced back to Bullish @Hedgeye TREND last week with a +1.2% weekly gain
- EUR/USD broke down (back to Bearish TREND @Hedgeye) with a -1.3% loss last week to -3.9% year-over-year
- Yen was down another -1.1% vs. USD last week and remains Bearish TREND @Hedgeye
- GBP/USD corrected -1.3% last week but remains a relatively new Bullish TREND @Hedgeye despite UK #Quad4
- Canadian Dollar was -0.6% vs. USD last week but remains Bullish @Hedgeye TREND alongside #InflationAccelerating
- Brazilian Real dropped -4.1% vs. USD last week to -9.7% year-over-year and remains Bearish TREND @Hedgeye
In other words, if the performance chase in US Equities thinks it’s Quad 1 or Quad 2 out there in either the US economy or in “multiple expansion” space (with downside to earnings in US Dollars), it better hope the Global Currency market has this wrong.
As a reminder, the US Dollar Index is only Bullish @Hedgeye TREND during US and Global #Quad4. In reported US and Chinese economic data terms this morning (China reported economic reality for OCT), both countries are in Stagflationary #Quad3.
There was no performance chase in China’s stock market last week. The Shanghai Composite Index was only +0.2% week-over-week and remains Bearish @Hedgeye TREND with a -1.8% smack-down overnight.
Macro Tourists can blame the protests or they can take a gander at the reported economic data:
A) Chinese Inflation (CPI) #accelerated to a new cycle high of +3.8% y/y
B) Chinese Producer Prices (PPI) slowed to a new cycle low of -1.6% year-over-year
Per Darius Dale’s Institutional Research notes this morning, “China’s Total Social Financing data for October confirmed our view that the USD remains far too strong on a broad trade-weighted basis to anticipate meaningful reprieve in China’s dollar liquidity squeeze.”
The annual growth rate of Bank Loans – the most relevant metric to track – slowed to a near 15 year low.
As you can see in today’s Chart of The Day, that’s not as low as the ALL-TIME low in net short positioning in the VIX (non-commercial CFTC Futures & Options showing a net SHORT position of -203,598), but relative to market positioning that’s still pretty low!
But you’re saying there’s a chance on a Chinese “recovery” from obvious secular slowing, eh? Or do you have friends in the business who are just hoping an ISM chart stops going down for one more month before year-end?
With my own hard earned moneys and personal accounts, hope is not a risk management process. It wasn’t at the end of 2007 when PMs were forced to chase stocks and it certainly isn’t now.
Instead of being long a major Index like SPY, I’m long some new things that continue to work here in Q4 of 2019 and should work during ongoing #Quad3 Stagflation in both growth and profits. Here are 5 ways to express our Macro Theme of #InflationAccelerating:
- CRB Commodities Index reflated another +0.6% last week confirming its new Bullish @Hedgeye TREND
- Oil (WTI) reflated another +1.9% last week confirming its new Bullish @Hedgeye TREND
- Natural Gas reflated another +2.8% last week confirming its new Bullish @Hedgeye TREND
- Energy Stocks (XLE) were up another +2.4% last week confirming their new Bullish @Hedgeye TREND
- Canadian Stocks (EWC) were up another +1.7% last week and remain Bullish TREND @Hedgeye
Meanwhile Street consensus remains net long the #BeanDeal via Soybeans (one of the biggest net LONG positions in CFTC Futures & Options terms) and they didn’t reflate last week. Soybeans were down -0.6% on the week to -1.1% year-over-year.
What also didn’t work last week were some of our latent #Quad4 Asset Allocations and Sector Exposures that would not work if the Chinese and US economies were heading into #Quad2 (where both real growth and inflation accelerate, at the same time):
- Long-term Treasuries were down, hard, with the UST 10yr Yield +23bps to -130bps year-over-year
- Gold corrected -3.2% last week to +15.9% year-over-year and remains Bullish TREND @Hedgeye
- Utilities (XLU) corrected -3.7% last week to +12.7% year-over-year and remain Bullish TREND @Hedgeye
- REITS (VNQ) corrected -3.4% last week to +13.0% year-over-year and remain Bullish TREND @Hedgeye
Again, this is what should happen to these exposures if both Chinese and US Demand is going to #accelerate into #Quad2. If it’s a higher conviction Stagflation and the USA is going to post a 0-handle on GDP for Q4 (our nowcast is at +0.58% q/q SAAR GDP)…
Then we have ourselves one heck of a final buying opportunity in core #Quad3 exposures like Gold, REITS, and Utes. Only people who have been long of those for 13 months know how impressive their volatility adjusted #FullCycleInvesting returns have been relative to SPY.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.66-1.97% (bearish)
SPX 3025-3106 (bullish)
RUT 1 (bearish)
Utilities (XLU) 61.40-64.77 (bullish)
REITS (VNQ) 90.50-95.55 (bullish)
Energy (XLE) 57.41-62.30 (bullish)
Shanghai Comp 2 (bearish)
VIX 11.90-15.37 (bearish)
USD 96.85-98.51 (bullish)
EUR/USD 1.09-1.12 (bearish)
USD/YEN 107.90-109.83 (bullish)
GBP/USD 1.27-1.30 (bullish)
Oil (WTI) 54.07-58.26 (bullish)
Nat Gas 2.45-2.92 (bullish)
Gold 1 (bullish)
Copper 2.63-2.72 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
