“Credit was suddenly in short supply.”
- Carey & Morris, King of Capital
For those of you who haven’t studied the relationship that US recessions have with super late cycle Credit investments, King Of Capital is a must read. The aforementioned quote came from the beginning of the end of The Cycle in 1989.
“The Junk market had cooled in 1989, but that October it completely froze up. The precipitating event was the break-down of the $6.8B employee-led buyout of United Airlines… across the board, investors began to take a new look at risks, and junk bonds were one of the riskiest forms of debt. It became nearly impossible to sell them.” (pg 107)
By the time the US was actually in a recession (1991), that was it for levered long investing. But no worries this time. After 1-month of crashing equity and credit prices, the Fed is going to buy everything, no matter where we are in The Cycle 6-12 months from now!
Back to the Global Macro Grind…
Welcome to Macro Monday @Hedgeye where I, for one, didn’t have my retirement accounts “re-balanced” out of what has saved my retirement money (Dollars and Treasuries) and into super late cycle speculative Credit ETFs!
Enough about that silly super-short-term panic that your central-market-planners and asset management firms alike are hyper-engaged in right now. We’re your longer-term, Full Cycle Investors here at Hedgeye. We’re big believers in economic gravity.
Let’s start with last week’s Counter @Hedgeye TREND move in the Global Currency market where you had another great buying opportunity in US Dollars:
- US Dollar Index gave back ALL of its gains from the week prior but is still +2.1% YTD after holding @Hedgeye TREND support
- EUR/USD was +4.2% last week towards the top-end of my Risk Range and remains Bearish TREND
- Yen was +2.6% vs. USD last week and remains a do-nothing FX pair as its signaling Neutral TREND
- GBP/USD popped a big +7.2% last week providing an excellent short-selling opportunity on Friday (still Bearish TREND too)
- Mexican Peso was +4.6% vs. USD last week in a Counter @Hedgeye TREND move but still -16.4% in the last month alone!
- Aussie Dollar bounced +6.6% vs. USD last week in a Counter @Hedgeye TREND move and is -6.1% in the last month
All this short-term action is doing to the Foreign Currency market is perpetuating … wait on it… yep, a break-out in cross-currency volatility. JPM’s FX Vol Index has effectively doubled to 11.85. That’s a very bearish signal for currencies like Mexico’s and the UK’s for that matter.
What the Fed didn’t buy last week were Commodities. Asset Managers didn’t “re-balance” into those “cheaper” assets (than Tech Stocks) either… so they continued to deflate, as they always do, as both the US and Global Economy fall deeper into recessionary #Quad4:
- CRB Commodities Index didn’t even have a bear market bounce closing flat on the week, crashing -24.9% in the last month
- Oil (WTI) deflated another -5.0% last week, crashing -54.5% in the last month alone, and remains Bearish TREND @Hedgeye
- Copper didn’t bounce like HIGH BETA Basic Materials “stocks” did – it was flat last week at -22.6% YTD too
What did bounce alongside paper Gold’s +11.2% weekly gain were:
- Silver +17.4% on the week cutting its 1-month loss to -18.0% (still Bearish TREND @Hedgeye)
- Palladium +42.6% (not a typo) on the week cutting its 1-month loss to -19.0% (still Bearish TREND @Hedgeye too)
- Orange Juice inflated another +12.0% last week taking its 1-month gain to +24.4%
So why aren’t we reading about active hedge fund managers who are long Treasuries and OJ?
Instead we have a bunch of these guys on the blower with CNBC and the Feds trying to come up with another “re-balancing” act… as they keep trying to take down gross exposure to late cycle Credit!
High Yield OAS Credit Spread only came in 92 basis points last week to +921bps over. That’s still +460 basis points wider in the last month alone and reminds you why PE Powell is in a panic to protect the Private Equity house of super late-cycle positioning.
It’s a good thing “Mom & Pop” watching CNN has no idea about that, yet.
And how about “stocks”? What a week it was after hitting fresh new cycle lows on Monday.
Well, sort of. Friday was a mess, with SPY down -another -3.4% (and HIGH BETA stocks down -6.2% on the day). Whoever chased SPY at the FEB cycle high only needs to be up +33%, from here, to get back to break-even.
With the 3-day bear market bounce, US Equities were up on the week, but they were led by:
A) REITS (VNQ) +17.4% on the week , cutting their 1-month loss to -21.7% … and
B) Utilities (XLU) +16.4% on the week, cutting their 1-month loss to -13.4%
With US Equity Vol (VIX) closing the week basically FLAT at 65.54, my risk management #process still calls ALL Equity Sector Styles un-investable. When that changes (like it did in my model in April of 2009), I’ll be the first to let you know.
For now, positive absolute returns of hard earned capital remain in short supply. So A) I’d hold onto those if you have them and B) not get sucked into the latest idea of central-market-planning trumping economic gravity as we go through Phase 2 of The Crash of 2020.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.60-1.02% (bearish)
SPX 2 (bearish)
RUT (bearish)
Utilities (XLU) 44.06-57.98 (bearish)
REITS (VNQ) 55.53-73.24 (bearish)
Tech (XLK) 68.09-82.99 (bearish)
VIX 53.59-84.11 (bullish)
USD 97.65-104.12 (bullish)
EUR/USD 1.05-1.11 (bearish)
USD/YEN 105.90-112.01 (neutral)
GBP/USD 1.12-1.24 (bearish)
Oil (WTI) 19.54-24.59 (bearish)
Gold 1 (bullish)
Copper 2.01-2.29 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
