Long Oil, Energy, and Inflation Yet?

“No bird soars in a calm.”
-Wilbur Wright

Risk happens slowly… then all at once. With consensus having chased Industrials (XLI) on the #BeanDeal in November and Small Cap charts (biggest net LONG position in Macro coming into this AM was the Russell 2000) into year-end, what could possibly go wrong?

I love the aforementioned quote. And I love it when a series of books that I’ve recently read are all cited in a new book. That’s learning from each other. In The MVP Machine, the authors cite Wilbur and the Mad Major (John Boyd) on the same page to introduce chapter 2.

“Boyd concluded that maneuvering for position was basically an energy problem… winning required the proper management of energy available at the conditions existing at any point during a combat engagement” (pg 20). That’s how I think about using my Risk Ranges.

Back to the Global Macro Grind…

“When John Boyd wrote his Aerial Attack Study, he applied physics to dogfighting.” When I write to you at the top of the risk management morning, I’m applying fractal math to trading.

If you don’t “trade”… because it makes you sound less sophisticated like a hockey-head like me… just tell people you have a #process that helps you risk manage your core Asset Allocations and single stock, commodity, bond, etc. positions… and you’re all good.

The entire point about Fading the Risk Range (i.e. selling at the top-end of the range and buying at the low-end) is that I’m using The Machine’s energy (short-term price momentum) to up the probability of making good entry and exit point decisions.

Btw, speaking of energy, are you long of both Oil (OIL) and Energy Stocks (XLE) yet?

Unlike Small Caps (which were actually down -0.1% on the day yesterday after the Russell 2000 was down -0.2% last week), Oil’s +3.6% ramp on “geopolitical risk rising” this AM comes on the heels of WTI being up another +2.1% last week.

If you’d like our Energy Policy Analyst’s (Joe McMonigle) Top 5 Catalysts for Oil markets, our team can send them to you (hint: Iran was one of them).

The transparent truth is that Top 5 and Top 10 lists aren’t why I got long Commodities, Oil, and Energy Stocks to begin with back in October of 2019. I got long them because of The Quads.

To review what Late Cycle #Quad3 Stagflation is:

1. The Cycle turn for INFLATION (from decelerating to accelerating) was in Q419
2. The Cycle for US GROWTH continuing to #slow, on a real basis, was obvious in the data in Q419
3. Pre today’s ramp in Oil, our GDP Nowcast for headline Q4 GDP #slowed to 0.32%

Everything and anything that could, should, or just did happen geopolitically simply augments the Bullish Phase Transition that was already in motion in both Oil and Energy Stocks for the past 3 months. Both Macro Tourists and The Machine will chase that now.

As a result, our “conviction” in a both our #InflationAccelerating and economic stagflation call goes straight up alongside Oil this AM.

Away from the year-end-compensation chase in “stocks” what other major Global Macro market signals get that this morning:

1. UST 10yr Yield is getting smoked to 1.81% after A) tapping the top-end of the Risk Range and B) confirming Bearish TREND
2. Gold just ripped the bears a new one, ramping +1.2% higher as Real Yields fall
3. US Dollar just broke bad (to Bearish @Hedgeye TREND) vs. the Japanese Yen

Oh, you mean winning this morning-to-date required the proper management of energy available at the conditions existing at any point during trading across the entirety of the interconnected global macro landscape? Yep.

Yesterday-to-date, I took The Machine’s bullish price-momentum energy towards the top-end of my SPY range to “sell-some” (or book gains) in 4 of 8 trading positions we had in Real-Time Alerts.

I also used the market’s negative short-term energy to fade the low-end of the Risk Range moves (i.e. I bought-some on red) in:

1. Coffee (JO)
2. Utilities (XLU) and
3. Sugar (CANE)

And I re-shorted Industrials (XLI) on green. It’s all timestamped. And, yes, you might think I’m crazy whipping it around like this. But crazy is as crazy does. Would you characterize someone who is long “PMIs bottoming on Trump Tweets” as non-crazy?

All I’m doing here is showing anyone who wants 100% transparency and timestamps how I use my Risk Range decision making #process to buy my #Quad3 Longs and make sales in #Quad3 Shorts. Who is it that you listen to daily? And what is it that they do?

If your looking at, God forbid, the actual ROC (rate of change) data every morning, you’ll note that the alleged “bounce” in PMIs did NOT happen in the month of December. Here’s Quadzilla’s real-time update on that to augment my Real-Time Alerts:

• Allegedly the “Great Soybean Bean Deal of 2019” and “NAFTA 1.2.0” were not panaceas for North America or global industrial demand, as generally confirmed by the DEC Markit Manufacturing PMI data (releases in the past 24hrs italicized):
• > 50 & Accelerating: South Korea, Taiwan, India – all three EME’s we like on the long side here in Q1
• > 50 & Unchanged:
• > 50 & Decelerating: China, France, Brazil, Canada, US
• < 50 & Accelerating: Russia, Indonesia
• < 50 & Unchanged: Turkey
• < 50 & Decelerating: Australia, Spain, Italy, Germany, Eurozone, UK, Mexico
• Regarding inflation broadly, 95% of the world’s top-20 economies are likely to record accelerating inflation in 1Q20E – the highest proportion since 2008. That’s a TRADE, not a TREND, as it relates to global bond yields, however. By 2Q20E, 75% of them are likely to report disinflation. That will likely present investors with a nice buying opportunity on the long side of duration risk in the coming weeks.

Yeah, so I agree that selling some of my GOOGL yesterday to buy some Coffee and Sugar might seem a little crazy for those of you who just do “stocks.” But I personally think some of those smid-cap-cloud narratives that people were chasing yesterday were crazier.

To be clear, we’re all a little crazy. But the only people that will look certifiably crazy by the end of Q1 2020 are those who weren’t long of Inflation Accelerating from its Q3 of 2019 cycle low.

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

UST 10yr Yield 1.78-1.94% (bearish)
SPX 3199-3267 (bullish)
Utilities (XLU) 63.52-65.00 (bullish)
Energy (XLE) 58.63-61.47 (bullish)
VIX 11.50-15.97 (bearish)
USD 95.88-97.49 (bearish)
USD/YEN 107.75-109.04 (bearish)
Oil (WTI) 60.38-64.07 (bullish)
Gold 192-1551 (bullish)
GOOGL 1 (bullish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer