“If you panic, that’s a good way to lose. You have to stay in control.”
- Ted Turner
That’s great advice from someone who’s managed plenty of business risk. Have you? For plenty of Millennial money managers, The Crash of 2020 is their first Full Investing Cycle (i.e. from a full employment, profit, and credit cycle peak) stock market #crash to risk manage. It’s my third.
The most important thing during stock market crashes is to NOT get sucked into the bounces. They are big but they are not buying opportunities. If you want to cover shorts and/or buy “stocks”, the best place to take a shot is from the low-end of my Risk Ranges. That’s why I built those.
Last night, the Fed opted for its 2nd panic-rate-cut in less than a month since the US stock market made an ALL-TIME HIGH.
Equity, Credit, and Commodity markets, globally, just told you that’s not a good thing. Now the Fed better hope it can get Treasury Bond Volatility under control, or “stocks”, Gold, and Treasury Bonds are going to go down at the same time.
Don’t forget that Treasury Bond Yields stopped going down in March of 2008. Not ironically, that’s around the time that Gold peaked too. It wasn’t until October of 2008, when bond yields started crashing again.
Back to the Global Macro Grind…
It’s Macro Monday @ Hedgeye. Just because other people are panicking doesn’t mean we change anything about our #process. Remember, it’s easier to make good decisions if you’re fundamentally aware of not only what economic Quad we’re in, but of @Hedgeye TREND Signals.
Let’s start with a week-over-week review of the FX market which put on an epic #Quad4 move last week:
- US Dollar Index ramped a big +2.9% last week re-confirming its Bullish @Hedgeye TREND signal level of support
- EUR/USD failed @Hedgeye TREND resistance closing down -1.6% last week
- Yen corrected -2.2% vs. USD last week but remains Bullish @Hedgeye TREND
- GBP/USD got crushed for a -5.9% devaluation last week and remains Bearish TREND @Hedgeye
- Aussie Dollar was devalued -6.5% last week! Yes, that’s Bearish TREND vs. USD too
- Norway’s currency was devalued -7.8% last week vs. USD as well and is one of the many Bearish @Hedgeye FX TRENDs
So you’re asking for a friend on why the US Dollar isn’t getting torched by $700B in QE5? A: Currency War – every other central bank is in panic-rate-cut mode too right now. Other than the Japanese and Chinese buying stocks, what else do these people think they can do? Stop gravity?
The real problem the Fed will face is if more of this happens:
A) STOCKS: keep crashing (SPY and Russell 2000 down -20% and -31% from their cycle highs, after Friday’s bounce)
B) VOLATILITY: US Equity Vol > VIX 31 was a Bullish @Hedgeye Phase Transition that made Equities uninvestable
C) BONDS: UST 10yr Yield was UP +20 basis points last week as Treasury Bond Volatility spiked
D) HIGH YIELD OAS: Spreads blew out another +177 basis points last week to +727 over
E) GOLD: down -9.3% last week as Gold Volatility entered a Bullish @Hedgeye Phase Transition (bearish for Gold)
Since their “risk framework” isn’t fractal in nature, the Fed and their followers have no idea why we’re seeing a singular breakout in volatility, across ALL asset classes now. This part of the MOVE moving alongside HY Spreads isn’t like 1987, it’s more like 2008.
When the MOVE (Treasury Bond Vol) moves out like this:
A) MOVE +11% last week closing at 138
B) MOVE is +118% in the last month alone
What that means is that even the Treasury market is confused about what’s next. Why? That’s easy, the Treasury market already front-ran The Fed, cutting rates to all-time lows, faster than at any other time in US history.
Yep, that means last night’s Fed panic was already priced in!
When the MOVE moves like that, the standard deviation of probable bond yield outcomes moves. That’s why the @Hedgeye Risk Range blew out last Thursday as the stock market was crashing. This morning’s UST 10yr Yield Risk Range = 0.57-1.18%.
This panic and confusion in the bond market isn’t just a US thing. It’s a global thing. Australia had a panic-rate-cut last week and their 10yr Yield was UP +30 basis points on the week to 0.98%
And this morning you’re seeing the low-quality Sovereign Credits (Italy, Greece, etc.) trade like crappy #LateCycle US Credits.
As a reminder, PRE-VIRUS, aggregate SP500 corporate PROFIT growth slowed to 0%. I know, if you have friends who were chasing the ALL-TIME HIGH in both US Credit and Equity Indices, what could possibly go wrong?
If they’re still long Junk (JNK) or Levered Loans (BKLN) I’m staying on the other side of them, and probably for a while! The Fed is buying Treasuries and MBS, not that toxic waste. And The Machine continues to SELL levered Factor Exposures aggressively, as it should:
A) HIGH DEBT/EV “stocks” crashed another -16.8% last week and are -30.3% in a month
B) HIGH BETA “stocks” crashed another -21.0% last week and are -38.4% in a month
At VIX > 31, > 51, and maybe > 71 this morning, all equity looks uninvestable, but a LOW BETA portfolio is down -13.0% over the same 1-month period during The Crash of 2020.
No, it’s not 1987. It’s not 2008 either. It is 2020 and just like the last 2 Full Cycle Peaks, I’ll risk manage this one using the same #process, having an open mind to whatever part of The Game I need to think about playing next.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.57-1.18% (bearish)
UST 2yr Yield 0.29-0.56% (bearish)
SPX 2411-2732 (bearish)
RUT 1045-1280 (bearish)
NASDAQ 7095-8270 (bearish)
Utilities (XLU) 52.54-59.99 (bearish)
REITS (VNQ) 70.81-80.76 (bearish)
Consumer Staples (XLP) 49.73-58.20 (bearish)
Tech (XLK) 71.98-86.27 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 164 (bearish)
DAX 87 (bearish)
VIX 35.66-74.85 (bullish)
USD 95.10-99.75 (bullish)
EUR/USD 1.10-1.13 (bearish)
USD/YEN 102.10-108.08 (bearish)
GBP/USD 1.21-1.28 (bearish)
Oil (WTI) 24.93-34.70 (bearish)
Nat Gas 1.60-1.99 (bearish)
Gold 11 (bearish)
Copper 2.36-2.50 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
