“Keep out of debt; get a job.”
- Roger Babson
Unlike many linear-econs, Roger Babson was an investor, entrepreneur and businessman. He was a big believer in both Newton and the gravity of cycles. While it’s hard to believe that in this day and age that makes you unorthodox and/or contrarian, it is what it is.
“Gravity, to Babson, wasn’t just an enemy. It was the enemy…”
“During the Depression he commissioned out-of-work stonemasons to engrave words of wisdom on boulders in the forests near the northern coast of Massachusetts” (The Trouble With Gravity, pg 181). The aforementioned Babson quote was one to live by.
Back to the Global Macro Grind…
It’s ground hog day (i.e. another Macro Monday @Hedgeye)! Welcome to the gravity of it all where we, instead of coming up an Aristotelian theory on the Earth being the center of the “V-shaped recovery” universe, are still doing rate of change math.
For non-FOMO observations, I usually start with a review of the Global Currency market:
- US Dollar (up another +0.7% last week) Index continues to signal a Global #Quad4 Depression/Recession
- EUR/USD continued lower, down another -0.2% last week and remains Bearish TREND @Hedgeye
- Yen corrected -0.4% vs. USD last week but is +2.5% in the last 3 months and remains Bullish TREND @Hedgeye
- GBP/USD continued lower, down another -2.4% last week and remains Bearish TREND @Hedgeye
- Brazilian Real lost another -2.2% last week and has crashed -26.6% in the last 3 months = Bearish TREND
- Mexican Peso lost another -1.3% last week and has crashed -22.6% in the last 3 months = Bearish TREND
As a reminder, through the lens of economic gravity (i.e. The Quads), the only time the US Dollar is strong and strengthening like this is when both the Global and US economies are seeing growth and inflation slow at the same time.
While it was a #Quad4 Deflation week for both the Global and US stock market, Oil had a big bear market bounce last week:
A) WTI was up +19.0% week-over-week taking its 3-month crash to -44.3%
B) Brent was up +4.9% week-over-week taking its 3-month crash to -43.2%
Inclusive of those epic bear market bounces, Commodities (CRB Index) were dead flat on the week at -27.9% for the last 3 months. Copper deflated another -3.1% taking its 3-month price momentum to -10.8%.
Why use 3-month instead of the “year-to-date” (which you only hear about when “stocks” are up big YTD, btw)? That’s simple. That’s where all the gravity of The Cycle TRENDS in our models (i.e. using 3-months or more as our @Hedgeye TREND duration).
Gold, for example, remains a Bullish @Hedgeye TREND because it was not only up another +2.5% last week, but it’s up +10.3% in the last 3 months, taking its Full Investing Cycle absolute return (since Q4 of 2018) to +47%.
Whereas a longstanding Bearish @Hedgeye TREND like the Russell 2000:
A) Was down another -5.5% last week … and has
B) Crashed -25.5% in the last 3 months
Another Bullish @Hedgeye TREND remains Treasury Bonds vs. a Bearish @Hedgeye TREND in High Yield Bonds:
A) UST 10yr Yield was down another -4 basis points last week and is down -94 basis points in the last 3 months
B) High Yield OAS Spread widened another +32 basis points last week and is +413 basis points wider in the last 3 months
Then, of course, there’s the general Bearish @Hedgeye TREND in Financially Levered Stahks!
A) REITS (VNQ) were down -8.3% last week and have crashed -30.9% in the last 3 months
B) Financials (XLF) were down another -5.6% last week and have crashed -32.5% in the last 3 months
I like neither of those Sector Styles during an economic depression or recession. We’re registering Bullish @Hedgeye TREND signals in Healthcare (XLV) and Tech (XLK). Healthcare had a great week, closing up +1.0% in last week’s sea of Global Equity red:
- France was down -6.0% last week taking its 3-month crash to -29.5%
- Italy was down another -3.4% last week taking its 3-month crash to -32.2%
- Russia was down -2.5% last week taking its 3-month crash to -27.8%
Yeah, I know. You don’t hear much about “Globally Diversified Equity Portfolios” year-to-date!
Just to finish up on that, the less diversified the equity component of your portfolio, the better right now. Tech is Bullish @Hedgeye TREND but don’t forget that only 2 stocks (AAPL and MSFT) make up 42% of the Tech (XLK) ETF!
Looking inside the Factor Exposures of the US stock market (SP500 btw was down for the 7th week in the last 11 which is the oddest “V-Shaped” looking thing to me):
A) HIGH BETA stocks got smoked for a -8.7% loss last week and have crashed -41.2% in the last 3 months
B) HIGH DEBT stocks got crushed for a -7.0% loss last week and have crashed -35.0% in the last 3 months
Don’t chase FOMO. Keep your job. And stay away from super-late-cycle and speculative debt.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.74% (bearish)
UST 2yr Yield 0.11-0.29% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Healthcare (XLV) 97.28-102.12 (bullish)
Tech (XLK) 89.21-96.01 (bullish)
Financials (XLF) 20.33-22.43 (bearish)
VIX 27.09-38.89 (bullish)
USD 99.40-100.94 (bullish)
EUR/USD 1.07-1.09 (bearish)
USD/YEN 105.82-107.98 (bearish)
GBP/USD 1.21-1.23 (bearish)
Oil (WTI) 23.79-32.01 (bearish)
Gold 1 (bullish)
Copper 2.32-2.42 (bearish)
MSFT 177-187 (bullish)
AAPL 293-318 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
