Big #Quad3 Divergences!

“The most important place you will find it is nearest to the hearts of Americans: the Dollar bill.”
- George Friedman

That’s a quote about American Principles (yep, hearing many people still have those!) from a recent book I’ve been riffing on this summer: The Storm Before The Calm, by George Friedman.

“Inventing the government was the preface to inventing a nation. Governments can be machines, but nations have to accommodate the actual lives of people. People don’t live abstract lives. They live real ones, within nations.” (pg 13)

For the real people getting paid by real companies (or not, because they are amongst the 10% unemployed, but are getting paid by the government), they are currently getting paid in devalued US Dollar bills. Their cost of living is rising, on a real basis, in kind.

Back to the Global Macro Grind…

Welcome to one of the last Macro Mondays of the summer of 2020. Not much going on out there, eh? Ha! Just wait until you focus your mind on the measuring and mapping of last week’s Global Macro market moves (which we do for you every Monday).

Let’s start with the omnipotent Global Currency market:

1. US Dollar Index had a rare “up” week, closing +0.2% on the week but remains decisively Bearish @Hedgeye TREND  
2. EUR/USD had a mild -0.4% correction last week but is +2.3% in the last month alone and still signaling Bullish TREND
3. YEN appreciated another +0.7% vs. USD and also remains Bullish TREND @Hedgeye  
4. GBP/USD was flat week-over-week and is +2.8% in the last month vs. USD = Bullish TREND @Hedgeye too
5. Brazilian Real was down hard, -3.5% vs. USD and is down -8.0% in the last month (one of the few Bearish TRENDs)
6. Indonesia’s Rupiah was +1.0% vs. USD last week and remains Bullish @Hedgeye TREND  

Yeah, we’re Bearish on the Dollar and Bullish on some, not all, Emerging Markets, partly because being right on a pervasively bearish US Dollar Devaluation perpetuates alpha in certain EM Equity Indexes.

We’re not long of Brazil (EWZ) but we remain long of Indonesia  (IDX), for example.

Short Brazil in either FX or Equity terms vs. Long Chinese or Indonesian FX & Equity is one of the many examples of a lengthening list of long and short positions one can currently have on in macro, making money on both sides. I love that.

Commodities, as an Asset Class, continue to show a BROADENING (yep, channeling my inner Pump, going ALL CAPS on you this morning!) inflation as US Equity Inflation is NARROWING:

1. CRB Commodities Index inflated another +0.5% last week and is +5.2% in the last month alone = Bullish TREND @Hedgeye 
2. Copper inflated another +1.8% last week and remains Bullish TREND @Hedgeye since June
3. Natural Gas inflated another +3.9% last week and has inflated +42.8% (not a typo) in the last month alone
4. Coffee prices inflated another +2.9% last week and have inflated +14.6% in the last month too
5. Silver inflated another +2.4% last week and has inflated +23.5% in the last month

‘Oh, KM, I don’t see much inflation.’ HAHA! Clearly, if these aren’t things you are long of in your account. Someone who is talking DEFLATION is probably long something like the “cheap” (and getting cheaper) Financials (XLF) which lost another -3.5% last week!

For people who like their charts, overlay a 1-month chart of Apple (AAPL) vs. Lumber Prices:

A) AAPL’s price inflated +8.2% last week for a 1-month inflation of +28.2%
B) Lumber inflated +14.4% last week for a 1-month inflation of +61.9%

‘Oh, ok, bud – I see it now, so bond yields should be ripping to the upside, eh?’ #Nope. That would be the case if the US economy was in #Quad2 (where both Real Growth and Inflation are #accelerating, at the same time, and Bank and Small Cap stocks actually win).

During #Quad3 Stagflation, Bond Yields remain suppressed and High Yield Spreads remain wide:

A) UST 10yr Yield dropped -8 basis points last week to 0.63%
B) High Yield OAS spread widened +3 basis points last week to +501bps over Treasuries

What else happens during #Quad3 Stagflation?

A) Tech (XLK), which is still our Top Long for #Quad3 in Q3, was +3.6% last week to +8.6% in the last month alone
B) Financials (XLF), which remain our Top Short for Q3, lost another -3.5% last week with a 1-mont return of 0.0%

0.0% is not good. But it could have been worse. What if you were long the following #Quad3 Shorts last week?

1. SMALL CAP (Russell 2000) was -1.6% vs. LARGE CAP GROWTH (NASDAQ) +2.7%
2. LEVERAGE (High Debt to EV) was down -3.3% last week and is only +1.3% in the last month
3. SLOW GROWTH (Bottom 25% EPS Growers) were down -2.8% last week and is -0.2% in the last month

-0.2% is not good either. But what if your hard earned wealth was lathered up further with some “cheap” European Equity “Value”?

1. EUROSTOXX 600 was down another -0.8% last week to -3.1% in the last month
2. French Stocks (CAC 40) were down another -1.3% last week to -4.1% in the last month
3. Spanish Stocks (IBEX) deflated another -2.4% last week to -6.8% in the last month

Down -4.1% or down -6.8%? Blah, make me puke, eh! The most obvious time you will get the attention of people on Wall Street is when 1-month price momentum inflates or deflates like last week’s did.

These were big time #Quad3 divergences, in devalued Dollar terms.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.54-0.71% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 10,855-11,414 (bullish)
Tech (XLK) 111.92-118.45 (bullish)
Financials (XLF) 23.99-25.51 (bearish)
Shanghai Comp 3 (bullish)
VIX 20.78-27.99 (bearish)
USD 92.21-93.80 (bearish)
EUR/USD 1.17-1.19 (bullish)
USD/YEN 105.15-107.09 (bearish)
GBP/USD 1.30-1.33 (bullish)
Oil (WTI) 41.48-43.61 (bullish)
Nat Gas 2.13-2.61 (bullish)
Gold 1 (bullish)
Silver 25.13-28.58 (bullish)
Copper 2.80-3.05 (bullish)
AAPL 460-507 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer