This note was originally published at 8am on March 28, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“It is the nature of inflation to give birth to a thousand illusions.”
Last week, despite the US Dollar posting a rare gain, The Inflation didn’t come down. It’s sticky – and that’s unfortunate because Deflating The Inflation is what America needs to get her confidence back. Not another low-volume stock market rally to lower-highs.
Here’s how the week-over-week Macro scorecard looked for Americans:
- US Dollar Index = UP +0.65% to $76.21
- CRB Commodities Index = UP +2.3% to 359
- WTI Crude Oil = UP +4.3% to $105.40
- Gold = UP +0.81% to $1427
- Copper = UP +1.8% to $4.41
- SP500 = UP +2.6% to 1313
- Volatility (VIX) = DOWN -26.7% to 17.91
- 2-year US Treasury Yield = UP +15bps to +0.73%
- 10-year US Treasury Yield = UP +17bps to +3.44%
- 30-year US Treasury Yield = UP +8bps to 4.50%
Not to put a wet Kleenex on your morning, but the reality is that well over half of America wakes up to not really caring so much about the US stock market. We, as a profession, have ourselves to blame for that. Many Americans think this game is rigged.
“So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run brings ruinous consequences to the whole community.” (Henry Hazlitt, “Economics In One Lesson”, page 170, 1946).
Sure, stocks going down again last week (like they had in 3 of the 4 weeks prior) would have been bad. But the US Dollar going down for the 10th out of the last 13 weeks would have been worse. Despite the massive week-over-week drawdown in market volatility (VIX) and a relative easing of headline news coming out of both Japan and the Middle East, the price at the pump hit a new weekly closing high for 2011 and this part of the economic cycle.
What part of the economic cycle is this anyway? The Big Government Interventionists would have you believe that this is the “growth” phase of the American dream. Last week’s revisions had US GDP growth running at +3.1% for the 4th quarter of 2010. But that’s using a joke of a deflator of 0.4% for inflation (you need to subtract inflation from nominal growth to get the reported number) – so what part of this joke are Americans missing?
Americans get the joke.
Whether you want to look at the weekly or monthly readings on American Consumer Confidence, they tell you the same story:
- Bloomberg Weekly Consumer Comfort Index = -48.9 last week versus -48.5 for the week prior (yes, those are minuses)
- University of Michigan Consumer Confidence = 67.5 for March versus 77.5 in February (one of the largest monthly drops on record)
At least stocks were rising alongside The Inflation in February. For the month of March, US stocks look like they’ll close flat to down. So my question is, As Growth Slows And Inflation Accelerates, what’s next?
Answering that question from a Macro Catalyst Calendar perspective, here what’s on tap in the immediate-term (this week):
- Monday – US Personal Income and Consumption (FEB)
- Tuesday – Conference Board Consumer Confidence (MAR) and Case-Shiller Home Prices (JAN)
- Wednesday – MBA Mortgage Applications (weekly) and II Bullish/Bearish Sentiment (weekly)
- Thursday – Month and Quarter End (MAR) and Producer Manufacturing Index (FEB)
- Friday – ISM Survey (FEB) and the Monthly US Employment Report (MAR)
Consumption will continue to be borrowed; Housing will continue to deteriorate; and High-Frequency Data (PMI, ISM, Confidence, etc.) will continue to remind us that markets are looking forward, not behind.
While I’ll be the first to acknowledge that a 7-day record drawdown in US stock market volatility was bullish for stocks last week, I was also the first US stock market bear to write “Short Covering Opportunity” at the SP500’s YTD low. I don’t Short-And-Hold.
Today, with the VIX -41.6% lower and the SP500 +4.5% higher, I’m a seller again. After moving the Hedgeye Portfolio to 16 LONGS and 4 SHORTS on Wednesday, March 16th, I closed last week with 15 LONGS and 13 SHORTS.
I also sold all of our exposure to US Equities in the Hedgeye Asset Allocation Model last week (sold Energy and Healthcare – XLE and XLV). Zero percent is now something The Bernank and I share in common. There’s always common ground to find somewhere.
On last week’s overall inflation of stock and commodity prices, I took our Cash position back up to 52%.
Here’s the Hedgeye Asset Allocation Model:
- Cash = 52%
- International Currencies = 27% (Chinese Yuan, Canadian Dollar, British Pound – CYB, FXC, and FXB)
- Commodities = 9% (Gold and Corn – GLD and CORN)
- Fixed Income = 9% (US Treasury Flattener and Long Term Bonds – FLAT and TLT)
- International Equities = 3% (China – CAF)
- US Equities = 0%
If you want to modernize a “Thousand Illusions” about The Inflation, check out MIT’s “Billion Prices Project” and hit the USA tab. It should provide you with some hope that reality will eventually be measured in real-time. In the meantime, as Hazlitt predicted, “The political pressure groups that have benefited from the inflation will insist upon its continuance.”
My immediate term support and resistance levels for the SP500 are now 1307 and 1323, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer