THE CASCADE – PINECONE MACRO RESEARCH February …...THE CASCADE – PINECONE MACRO RESEARCH...
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THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019 www.pineconemacro.com @pineconemacro [email protected] 1 Time to Sell South Africa Again If you have followed my work for a while, you know I am a raging bear on South Africa. Despite that, I have been on the sidelines waiting for the right time to get aggressive on betting against SA assets again. Well, I think that time is now at hand. I will be looking for entries soon. I zeroed in on SA when I knew I wanted to get short EM because I was convinced the dollar would hurt emerging economies in 2018. When I researched deeply about multiple countries I settled on Turkey and South Africa to bet against. Sadly I missed out on the entire Argentina fiasco because I did well in Argentine stocks after Macri was elected. I let that cloud my vision on the bear case for Argentina and despite selling on time – never made money on the short side. If you look into SA, there is plenty to be bearish about. GDP is at 1.5% and has not been above 2% for back to back quarters since 2014. The unemployment rate is 27% and youth unemployment is 53%. Inflation is 5% and the policy rate is at 6.5%. The current account has been deeply negative since the early 2000s. It is currently -2.5% compared to GDP. South Africa Current Account South Africa’s credit is junk for all but one major credit rating agency. If/when that goes, a lot of portfolio money will go up in smoke and SA depends on that money. SA’s manufacturing PMI is under 50 and has been since June.
Transcript of THE CASCADE – PINECONE MACRO RESEARCH February …...THE CASCADE – PINECONE MACRO RESEARCH...
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
www.pineconemacro.com @pineconemacro [email protected] 1
Time to Sell South Africa Again
If you have followed my work for a while, you know I am a raging bear on South Africa. Despite that, I have been on the sidelines waiting for the right time to get aggressive on betting against SA assets again. Well, I think that time is now at hand. I will be looking for entries soon. I zeroed in on SA when I knew I wanted to get short EM because I was convinced the dollar would hurt emerging economies in 2018. When I researched deeply about multiple countries I settled on Turkey and South Africa to bet against. Sadly I missed out on the entire Argentina fiasco because I did well in Argentine stocks after Macri was elected. I let that cloud my vision on the bear case for Argentina and despite selling on time – never made money on the short side. If you look into SA, there is plenty to be bearish about. GDP is at 1.5% and has not been above 2% for back to back quarters since 2014. The unemployment rate is 27% and youth unemployment is 53%. Inflation is 5% and the policy rate is at 6.5%. The current account has been deeply negative since the early 2000s. It is currently -2.5% compared to GDP.
South Africa Current Account
South Africa’s credit is junk for all but one major credit rating agency. If/when that goes, a lot of portfolio money will go up in smoke and SA depends on that money. SA’s manufacturing PMI is under 50 and has been since June.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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The above charts are from my pal Mehul Daya who works at Nedbank in South Africa. Mehul is one of the minds I most respect in the dollar liquidity world and it keeps him ahead of the curve for EM and SA investors. What Mehul is showing us here is that SA depends on foreign investors. With dollar shortages in 2018 – we saw some ugly bouts for SA assets. At the end of the day South Africa needs an environment where the dollar is weak and EM has a solid macro backdrop – which largely depends on China. Oh and they cannot afford another credit downgrade. So it is easy to be bearish on SA if you are a dollar bull or if you dig into the basic fundamentals of the country. But another reason is politics. You have likely seen the farm violence and land reform headlines and much of that is blown out of proportion – but political fractures in South Africa are real and they are important. Most headlines focus on the ruling ANC’s policy prescriptions but the real reasons for the ANC’s projected hard line on land reform is the pressure being put on them by the populist/Marxist EFF party. The EFF is led by a guy that is so Marxist that he loves Chavez and Mugabe even after they turned their countries upside down. The issue is the ANC has been so corrupt and ineffectual since they took power under Mandela (the ANC has run the country since) a generation ago that they made themselves easy targets.
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Inequality issues, both racial and economic, have largely not been adequately addressed and ANC offcials have enriched themselves in government with one corruption scandal after the next, including current prominent officials. So an upstart radical party led by a young revolutionary promising real equality and retribution for injustice sells pretty well to much of the country. Nobody thinks the EFF will win big in the May elections, but they are now in a position to truly effect national policy and to push the election into doubt more than any time post apartheid. Julius Malema, the EFF leader draws incredible crowds of great size and passion when he holds political rallies. I have been writing about how I think he could surprise the world this May. The ANC is currently polling about 10% lower than they did in 2014 and the EFF is gaining more share and polling at 13% now. This following is a headline from Al Jazeera last week. In December, reports had the EFF falling in the polls, so we are seeing a quick u-turn. One thing that will be important is how the economy peforms between now and May. If the dollar were to break higher and hurt SA assets, we could see a surge in EFF popularity. If the EFF surprises at the polls – it could cause significant unease among foreign investors.
Okay, time to move on to the charts.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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USDZAR – Dollar/Rand - Weekly
Right now the dollar is at the 200W vs the rand and threating to break higher off the bottom of the bull flag channel. Even if we do not get new highs in the pair, a move to the top of the channel near 14 looks very likely. If we do get rejected at the 200W – below is an old UTL as well as the 61.8% retrace level. That area would be a great risk reward level. I will buy a daily close above the 200W and will use the 200W as a level to base a stop off of.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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EZA – South Africa ETF - Weekly
South African stocks have rallied about 20% after a 40% drop. We rallied up near the 38% retrace and after tagging the 200W, started to fall hard. On a daily or even a 4 hour chart you can see a broken flag that led to the fall mid-week last week. We could be headed for a test in the 40s soon. Just like the currency, I will look to get short and use the 200W as a level to build a stop off of.
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US Stocks
S&P 500 - Weekly
Last week I highlighted the fact that we were hitting a DTL, the 61.8% retrace, and were in a supply zone of previous support. On a daily you would also see that we came within an inch of the 200D last week. I lean bearish after the weak close to end last week in a near doji candle. After 6 great weeks in a row, we are due for some giveback now that the Fed has done a strong and public 180 and Powell lost all of his hawk street cred. The market has not really stopped to digest the fact that the Fed may be so dovish because the economy is weakening so quickly and earnings are being revised down in a big way lately. As you are about to see – credit spreads, the VIX, and the Bristlecone Index are all suggesting a pullback.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Credit Spreads – SHY/HYG - Weekly
I have mentioned the top of this rectangle in credit spreads for weeks and we have tested it the past two weeks and had a nice close for stock bears at the end of the week. Spreads widening after testing the rectangle and the 200W suggests to me we are about to ratchet up the volatility and the downside risk is as high now as it has been since the Christmas bottom.
$VIX – Weekly
VIX tested the 200W and is right at the top of its own rectangle. I think being long vol here makes a lot of sense.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Bristlecone Index – Cyclicals/Defensives – Weekly
The rally in cyclicals has made this rally look like it is on solid footing thanks to the Fed’s retreat. However, I do not think that is the case. We just got rejected by an interesting level last week and look poised to see cyclicals roll over – possibly hard in the weeks ahead. Be ready to raise cash if you run a portfolio or get short stocks if you are a tactical trader.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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DXY
$DXY – Daily
The dollar is still within its 95.50-97.50 range that I have assigned a lot of value to. For now we continue to chop along. It is worth noting that we stayed in this range despite 3 hikes disappearing with Jay Powell’s Hawk credentials. The Powell Put could not even break the dollar. We did see a break above a DTL and a nice retest of it with a solid close to the week last week. I have been saying for months that the Chinese economy is worse than most traders realize and will take longer to resolve than they expect. This hurts EM and Europe more than the US and will help drive the dollar higher. We are still playing this game and I am still a dollar bull because of it. I have been surprised by the recent strength and it just makes my medium term bullish convictions stronger. I still expect challenges short term from debt ceiling mechanics and hope it pressures the dollar lower to set up some great entries in long dollar trades.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Bonds
Before I dive into the charts, I wanted to express my 30k foot view on the treasury market – because it has changed. I was a hard core bond bear from September of ‘17 until I flipped to being a tactical bull in November of ’18. I remained a longer term bear believing we had put in the lows in yields and we were never going back. Many of the drivers for my bearishness still exist – especially supply and demand dynamics. However, the swing producer of liquidity and growth in the global economy is cratering and it is in their best interest not to reflate the global economy. That is a big deal. So is the fact that China’s most important export may be deflation in the months and years to come. It is difficult for me to be a bond bear in a world where China is no longer pumping liquidity and inflation into the global economy. I feel so strongly about Chinese deflation that I cannot be a bond bear but feel strong enough about supply/demand to keep me from being a huge bull longer term. I do firmly believe in being a tactical bull however. The Fed has already started whispering about QE and ending QT and we cannot ignore that. We went from hawkish to QE chatter faster than I thought possible and I know that matters and has to be taken seriously. A few months ago I wondered if the Fed would eagerly buy up excess supply of treasuries in a new slowdown, but as of right now, I have no doubt they will - without flinching. That is clearly bullish for bonds. Supply will be irrelevant if the Fed is going to buy half of it.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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2 Year Yield – Weekly
Considering my view on stocks and VIX and spreads – I am bullish bonds and think the 2yr has a date with 2.3%.
5 Year Yield - Weekly
The 5yr yield is testing the TL going back to 2016 for the 4th time since late 2018. If we get a close below this TL, I think we are headed to 2.25% in short order and likely to test 2.15 in the first half of the year.
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10 Year Yield – Weekly
The 10yr is at a very important level of previous resistance that bond bears desperately need to turn into support now. There have been four weekly instances where this line has been support but that is likely softening. Considering where we are on spreads and the VIX – I expect yields to break lower with the next support level being in the 2.4s. 30 Year Yield – Weekly
The 30 year has broken its TL but still has a nice support area – I would not be long the 30.
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Currency of the Week
AUDUSD – Australian Dollar / US Dollar - Weekly
The Aussie continues to be my favorite FX play. I am very bearish the Aussie and will look to add on a break below .701.
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Commodity of the Week
Copper Futures - Weekly
Copper hit an old TL last week as well as a supply level (red). As a China bear and a global growth bear – I am a copper bear. Watching the tests of both sides of the triangle will be worth watching in the weeks ahead. It is worth noting that copper bottomed at about the same time as US stocks and spreads etc. This of course coincided with a spike on global central bank liquidity and global money supply. If that sugar high rolls off and Chinese data continues to disappoint – look for a new test of the 200W near 2.6.
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Stock of the Week
Home Capital – HCG - Weekly
I was fortunate enough to capture a lot of the pre-Buffett downside in Home Cap and I covered when the Oracle of Omaha stepped in. Despite that I am still very bearish this company and always looking for a technical reason to get short. We have been in a tight two year rectangle and Buffett recently dumped his stake in the Canadian subprime lender. We are approaching a couple of possible technical opportunities with the UTL and the bottom of the rectangle possible coming into play. If we get a breakdown below the bottom of the rectangle I would certainly put on a short position and would consider a quick short of the trendline.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Ratio of the Week
TLT/JNK – Treasuries vs Junk Bonds - Weekly
Treasuries have been retesting the 200W versus junk and last week started to head higher. I expect this ratio to break higher signaling a risk off move. Keep an eye on this one for hints to the macro environment for US risk assets.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Dumpster Fire of the Week
EWG – MSCI Germany Index Fund - Monthly
Europe’s powerhouse economy – Germany – is flirting with a recession and despite being able to finance government debt for better than free – German stocks are a dumpster fire.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Charts of the Week
Global Money Supply via Daniel Lacalle
Explains the recent risk on…
I wonder what happens next…
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Tweet of the Week
Read of the Week: WSJ article about Trump’s plans to boost AI and 5G – Keeping up with the Tech War will be very important in the months to come. Listen of the Week: Macro Voices had on Alex Gurevich for a good, wide-ranging macro interview. Watch of the Week: Grant Williams’ new “On The Road” series on RV is pretty great. In the first episode he talks to Steve Diggle in Italy. Great stuff
I am grateful for your time and your readership. Thank you. Your Macro Analyst, -Chase Taylor
This was a good post and thread from my friend from down under. Click the image for the thread. Prometheus’ charts underscore my bearishness on the Aussie.
THE CASCADE – PINECONE MACRO RESEARCH FEBRUARY 11TH, 2019
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Quote of the Week
“There is in the garden a plant which one ought to leave dry, although most people water it. It is the weed called Envy.”
― Cosimo de' Medici
Disclosure: Pinecone Macro Research, LLC is an independent research firm. Pinecone Macro’s letters are based upon information gathered from various sources believed to be reliable but are not guaranteed as to accuracy or completeness. There are risks in investing. Any individual report is not all-inclusive and does not contain all of the information that you may desire in making an investment decision. You must conduct and rely on your own evaluation of any potential investment and the terms of its offering, including the merits and risks involved in making a decision to invest. The information in this letter is not intended to be, and shall not constitute, an offer to sell or a solicitation of an offer to buy any security or investment product or service. The information in this report is subject to change without notice, and Pinecone Macro assumes no responsibility to update the information contained in this report. There is risk in trading markets. Pinecone Macro is not an investment advisor. My letters are based upon information gathered from various sources and believed to be reliable, but are not guaranteed as to accuracy and completeness. The ideas and trades I share are my own and are for informational and educational purposes only and should not be construed as investment advice. Accordingly, you should not rely solely on the information in making any investment. You should always check with your licensed financial advisor to determine the suitability of any investments.
