Welcome to the USD edition of Macro Daily!
At HFI Research, we are humble students of the market. We are predominantly value investors but pay a great deal of attention to macro trends and shifts. In early 2017, one of our biggest variant views was for the U.S. dollar to decline. We said the following:
The Dollar Trade Continues to Unwind
The basis of many of my investment themes requires the crowd to be overly consensus on one side. The long dollar trade coming into 2017 was by far one of the most consensus trades I had seen, and the recent weakness is a testament to the idea that the wisdom of the crowd is wiser.
To put it more bluntly, the long dollar trade has likely met its match. I say this because, in the currency market, macro forces drive fundamentals. Technical trends develop far before the actual implications are understood. Why is it that global inflationary indicators are showing inflation on the rise, and deflationary thematic ideas selling off?
Since then, the euro has made a new multiyear high, and USD is sitting at a crucially important technical and psychological support level.
Why Is “King Dollar” So Important to Us?
- Inflationary forces trending higher
- Value outperforms growth
- Global commodities move higher
- Interest rates move higher
The four themes we just listed positions for how we think about our portfolio not only for this year but for many years to come. The breakdown in “King Dollar” will foreshadow another multiyear uptrend in value and inflationary-proof names.
For value investors and active portfolio managers, the start of this breakdown will also make the stock market more of a “stock picker’s market” vs. the passive bubble that has taken over the last ten years.
This can also be seen in the value vs. growth index, which has been underperforming for over 10 years:
Value Vs. Growth Overlapped With Inverse Dollar Chart
In our view, value investors will start to reap the rewards as inflationary forces have coincided with value stocks outperforming growth names. In an earlier article – titled “Interest Rates Appear To Be On The Cusp Of Breaking Out Against A Multi-Decade Long Bear Market – What Are The Implications For Investors?” – we listed the sectors that we believe will perform well over the coming years:
How Are We Positioned?
We continue to believe that energy stocks are on the cusp of a multi-year bull trend. We’ve been saying this since last year and continue to harp on this point. In an article, we published last year titled “Paradigm Shift – Energy Stocks Are On The Cusp Of A Multiyear Bull Trend,” we said the following:
What is certain, though, is that there are practically no scenarios right now to take us off this path of an impending oil shortage. The world is not ready for the end of cheap oil, and the only ones positioned to profit will be the investors who own energy stocks. Surprisingly, the interest in energy stocks has never been lower since 2004. Go figure, right?
Even with oil prices recently rising to a multi-year high, we find the complacency in the market eerily similar to last year. Some analysts still believe oil prices won’t maintain this level and will fall back. It’s this level of complacency, along with erroneous storage forecasts, which will see the sentiment shock we are expecting.
So, how are we positioned?
We are very long energy names and continue to be. We think it’s the start of a multiyear uptrend, and we are just entering the first inning.
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Disclosure: I am/we are long OIH.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.