“Confidence is contagious. So is lack of confidence.”
- Vince Lombardi
In the era of COVID, “Contagion” is unlikely to be a very popular title of a research note. But in this instance, we are talking about the contagious nature of ideas. In stock markets, we see this contagious nature of an “idea” or “narrative” all too frequently.
In many ways, this year may have taken the cake with the "meme stock" frenzy. Now those who were on the right side of some of these trades (like GameStop which is up +1,000% in the YTD) the concept of investing in contagious ideas has been fairly lucrative.
But when those ideas lose their luster, or contagiousness, it can be very painful. On that front, we need to look no further than most SPAC stocks, which have fallen meaningfully from their YTD highs with many trading below redemption prices.
More importantly though, how do you recognize when an idea might become contagious? Well according to Jonah Berger, who wrote “Contagious: How to Build Word Of Mouth In the Digital Age”, there are six key things that identify a contagious idea:
- Social Currency – How does it make people look to talk about the idea?
- Triggers – Are people reminded to talk about the idea?
- Emotion – Does the idea or concept strike an emotional chord?
- Public – Can people see when others are using the idea?
- Practical Value – Is the idea useful to people?
- Stories – Finally, and likely most important, what broader narrative can we wrap around the idea?
So, in conclusion . . . forget fundamentals! If you’re next stock pick has these contagious attributes, it might just put in a bit of a shift of price outperformance. Especially if the fundamentals are improving and the short interest is high.
Back to the Global Macro Grind...
As we move from narratives to the economic data, there is less of an opening for stories to drive price (though macro tourists sure try at times). But in the real world, growth and inflation are either slowing or accelerating, and asset classes over time are likely to perform based on that.
Well, unless of course, the name of your country is China. As an example, consider these recent data points:
- PPI +9.5% Y/Y and accelerating
- CPI +0.8% Y/Y and decelerating
- Exports +25.6% and imports +33.1% Y/Y, both accelerating
- Manufacturing PMI at 49.2, which is contractionary
If there is a story to tell here, it is simply that these data points really don’t collectively make sense. We have extremely inflationary and high growth data points, but also just the opposite. And now that I think about it, maybe it is not a surprise that Evergrande’s debt has gone no bid.
But then again, in a centrally planned economy, the leaders can basically do what they want, comrades. Take the loan data from China this morning as example. Total social financing came in at CNY 2.96 trillion up from the prior reading of CNY 1.06 trillion . . . which for those of you without an HP-12C is 179% growth sequentially. Not bad if you want to arrest the demise of your economy and stock market!
In as much as the recent Chinese economic data might be confusing, the global inflation data is much less so. One of our favorite things to track is shipping rates. On that front, in the most recent week Drewry’s Composite World Index was up 1% W/W and . . . wait for it . . . up 309% Y/Y. This is also up some 200% from the 5-year average.
So, if you ship something globally, it has gotten very expensive. But then again, we know this because every economic survey and corporate earnings report has emphasized these supply chain issues. Take the U.S. automobile market. At the moment, as you can see in the Chart of the Day, domestic auto inventories on lots are literally as low as they have ever been.
Low inventory, high shipping rates, and supply chain constraints are of course inflationary. That said, the fact that the price of some fruits and vegetables is down Y/Y makes the Director of the National Economic Council Brian Deese think inflation is not such a big deal. That notwithstanding, of course, in the last CPI report . . . 19 of 20 subcategories were up Y/Y.
There are economic stores and then there is data. The data is telling us that inflation is here, it is sticky, and it just might accelerate into Q4. Then the question becomes whether the economy also accelerates. So, in essence, will we get a #Quad2 or #Quad3?
With global daily COVID cases -9% in the past seven days versus the prior seven days and U.S. COVID down -12% over that same period, it sure does seem that the rate of change of mobility restrictions will be a tailwind economically. Meanwhile, small caps, via the Russell 2000, have confirmed bullish Trend in our models . . .
It is certainly too early to go full fledged #Quad2 junk trade, but we are waiting and watching . . .
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.25-1.38% (neutral)
UST 2yr Yield 0.19-0.25% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 15,0013-15,524 (bullish)
REITS (XLRE) 46.80-49.41 (bullish)
Tech (XLK) 156.57-160.13 (bullish)
Utilities (XLU) 67.99-70.50 (bullish)
Energy (XLE) 47.22-50.52 (bullish)
Shanghai Comp 3 (neutral)
Nikkei 27,353-30,502 (bullish)
VIX 15.01-18.99 (bearish)
USD 91.88-92.97 (bearish)
Oil (WTI) 67.46-71.20 (bullish)
Nat Gas 4.28-5.11 (bullish)
Gold 1 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
