“I was too busy trying to survive the crash.”
- Col. Carlyle Smitty Harris (Ret.)
I’m fortunate to have been in good health and able to write to you at the top of almost every risk management morning during the quarantine. I’ve also had some time to catch up on my reading list. The aforementioned quote came from an inspirational book about a POW called Tap Code.
“In one split second, I passed from the known to the unknown – from a comfortable, safe, and ordered life into a hostile environment filled with danger and trauma… I’d trained for this.” (pg 9)
That’s how Colonel Smitty Harris described getting shot-down in his F-105 flying over Vietnam in 1965. He was a Prisoner of War until his release back to America in 1973. In a profession that seems to value bailouts and socializing investment losses over sacrifice, God bless our bravest.
Back to the Global Macro Grind…
It’s another Macro Monday @Hedgeye. I hope you all had a healthy long weekend. Post the Fed’s most recent bailout of super-late cycle (High Yield Debt) investment mistakes, I’m tasked with doing what I always do on the weekends – executing on the ROC (rate of change) #process.
Let’s start with the Global Currency market:
- US Dollar Index had a Counter @Hedgeye TREND correction of -1.1% last week but is +3.2% YTD and remains Bullish TREND
- EUR/USD bounced +1.3% last week to -2.5% YTD and remains Bearish TREND @Hedgeye
- Yen was only +0.1% vs. USD last week to +0.2% YTD and remains Neutral TREND @Hedgeye
- GBP/USD bounced +1.7% last week to -5.9% YTD and remains Bearish TREND @Hedgeye
- Brazil’s Real had a bear market bounce of +4.8% vs. USD last week to -21.3% YTD but remains Bearish TREND @Hedgeye
- Aussie Dollar had a bear market bounce of +5.8% vs. USD last week to -9.6% YTD but remains Bearish TREND @Hedgeye
Yep, it’s been a lot easier for non US Equity centric people to see Deep Global #Quad4 through the lens of both the Global FX and Rates markets. For some reason, bear market bounces in currencies are easier to understand than those in late cycle Credits and “Stahks!”
Btw, I’m only using “year-to-date” (YTD) today because it captures the front-end of my intermediate-term TREND duration. In terms of @Hedgeye TRADEs (3 weeks or less) vs. TRENDs (3 months or more):
- 2yr US Treasury Yield was flat last week and is down -134 basis points YTD, confirming Bullish @Hedgeye TREND for 2s
- 10yr US Treasury Yield was +12bps last week but is down -120 basis points YTD, confirming Bullish @Hedgeye TREND for 10s
- High Yield OAS Spread was -157bps last week but is UP +449 basis points YTD, confirming Bearish @Hedgeye TREND for HY Debt
Most of that Counter @Hedgeye TREND move in High Yield Bonds came on Friday’s Fed news that they are going to buy whatever they need to buy to pander to their constituency of friends who can’t quite afford to believe in economic gravity, yet. Give it time.
I didn’t short High Yield Credit (HYG) on that move because these people seem to be quite committed to not having free-market price discovery. That sadly said, since they haven’t lobbied the Fed to buy Commodities and/or Oil yet, those prices continued to deflate:
A) CRB Commodities Index had no bear market bounce, closing -0.1% last week at -31.2% YTD = Bearish TREND @Hedgeye
B) Oil (WTI) resumed its #crash, losing another -19.7% last week to -62.0% YTD = Bearish TREND @Hedgeye
So, in addition to staying with my Core Asset Allocations to US Treasury Bonds on both the short-end (SHY) and long-end (TLT) of the Treasury Yield Curve, I took Thursday’s correction in “risk off” assets as another buying opportunity in Extended Duration (EDV) Treasury Bonds.
To be clear, there’s a big difference between investing longer-term, across the Full Investing Cycle (we’ve been long Treasuries since Q4 of 2018) and trying to centrally-plan short-term moves in “risk on” assets that have been crashing (like super late-cycle and speculative Credit).
While some were celebrating the commensurate short-term bounce in levered HIGH BETA “stahks” last week, longer-term Full Cycle Investors enjoyed Gold being up another +6.5% on the week to a league leading (for Macro Investors) +14.2% YTD gain.
Not to be confused with -25.3% YTD for Small Cap “Stocks” (Russell 2000, IWM) or -28.4% for IWM since The Cycle peaked in both US GDP & Profit Growth in Q3 of 2018, Gold is up +45.1% since October of 2018. Now that beta and volatility adjusted return is what real bulls are talking about!
But what about those US stocks? Well, last week’s move can be summarized simply:
A) Utilities (XLU) “beat the market” at +17.5% on the week to -5.9% YTD, moving to Neutral @Hedgeye TREND
B) Financials (XLF) “beat the market” at +19.0% on the week to -24.0% YTD and are still Bearish TREND @Hedgeye
Inclusive of January’s ramp in everything market beta, Utilities are the “best” US Sector Style YTD, whereas Financials are one of the worst. Yeah, they’re going to need bigger centrally-planned bear market bounces to change the economic gravity associated with that. Don’t fight The Cycle.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.81% (bearish)
UST 2yr Yield 0.15-0.32% (bearish)
SPX 2 (bearish)
RUT 1116-1271 (bearish)
Utilities (XLU) 50.18-61.75 (neutral)
Consumer Staples (XLP) 52.92-58.99 (neutral)
VIX 37.31-60.99 (bullish)
USD 98.54-101.14 (bullish)
EUR/USD 1.07-1.10 (bearish)
USD/YEN 106.45-110.02 (neutral)
GBP/USD 1.21-1.26 (bearish)
Oil (WTI) 18.01-28.84 (bearish)
Gold 1628--1760 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
