“Do we have the resources to handle the demands?”
-Steve Magness
When it comes to risk managing your portfolio across the Full Investing Cycle, that is a great question! It’s a question that Steve Magness asks in Do Hard Things. “Facing reality” is an important concept. Know what you’re capable of before you commit.
As Magness goes on to explain, many people aren’t proactively prepared to play at the highest level. “They’re doomed before they start. Their ability to handle adversity starts well before they ever encounter any difficulty.” (pg 50)
I can handle the adversity of bear market squeezes because I know I can. The reality is that this is my 3rd major bear market in going on 24 years. I have 82 employed teammates supporting me. I don’t live in fear and panic. I calmly execute on my #process.
Back to the Global Macro Grind…
Coming into month-end there are plenty of new narratives out there. Very few of the consensus ones are supported by any numbers in our ROC (Rate of Change) Risk Management #process. Here are two big ones:
A) 1H23 US Growth Expectations are now officially way too high
B) 1H23 China Growth Expectations may be too low
How do you position for that?
A) Short US Growth, Profitless Tech, Crypto, etc. (QQQ, XLY, BITO, TSLA, etc.)
B) Long China (KWEB, EWH, PDD, MLCO, DIDIY, etc.)
What’s most interesting to me about The Setup (on both)?
A) Consensus US GROWTH expectations are as far off as INFLATION expectations were when they called it “transitory”
B) Our expectation for China’s economic #acceleration is for #Quad1 in Q2 of 2023, and they accelerated this morning
In ROC (Rate of Change) fact, this is one of the fastest month-over-month #accelerations off a Cycle Low that we’ve ever seen:
A) China’s Services PMI for JAN #accelerated to 54.4 from 41.6 in DEC!
B) China’s headline PMI for JAN #accelerated less, but still accelerated, to 50.1 from 47.0 in DEC
Why the difference in Services #acceleration vs. Old China (Manufacturing PMI)? They re-opened the Services economy for the 1st time since shutting down the bloody place for 2 years!
That’s right, our #Quad3 and #Quad4 China SLOWING position was 2 years (or 8 QUARTERS) old prior to this #acceleration in Q1 of 2023 and this may be 1-3 months ahead of the nowcasted #Quad1 in our GIP (Growth, Inflation, Policy) Quad Model.
Now that you’re all bulled up on China, let’s get you BEAR’d up (again) on US Growth:
A) Our GDP Nowcast is for US GDP to slow towards +0.33% year-over-year by Q2 of 2023
B) Our GDP Nowcast is for headline Q/Q SAAR GDP to slow to -2.4% in Q1 of 2023
To put those critical numbers in context:
A) US GDP was +1.94% year-over-year in Q3 of 2022 (that’s a LOT more than Dr. Zero +0.33%)
B) US headline Q/Q GDP for Q4 of 2022 was +2.9% “growth” while GDP slowed to +0.96% year-over-year
Back to my original risk management question for the Full Investing Cycle: do you have the resources to handle the demands of A) contextualizing The Cycle specifically like I just did and B) execute on fading/trading (risk managing) consensus expectations?
This is what consensus expectations look like this morning:
A) #1 headline story on Bloomberg.com “IMF Says Growth Bottoms”
B) We just saw the 99th percentile of US Equity Hedge Fund Short Covering going back 5 years
When both Consensus Econs and Consensus Positioning diametrically disagrees with the highest probability and proprietary Hedgeye Nowcast, we have ourselves what we call a Selling Opportunity. And no, that’s not today. It was on green on Friday.
The best part: MANY market participants are basing their expectations on 50-day Moving Monkey charts and/or “feelings” about a world they want and/or need to see. We don’t need to see anything they see. We need to see reality.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.35-3.61% (bearish)
UST 2yr Yield 4.06-4.34% (bullish)
High Yield (HYG) 75.12-76.65 (bearish)
SPX 3 (bearish)
NASDAQ 10,704-11,618 (bearish)
RUT 1 (bearish)
Tech (XLK) 126-138 (bearish)
Consumer Staples XLP) 71.80-74.01 (bearish)
Healthcare (XLV) 130-134 (bearish)
Defense (ITA) 107-115 (bullish)
Utilities (XLU) 67.86-70.90 (bullish) `
Shanghai Comp 3142-3299 (bullish)
VIX 18.25-22.53 (bullish)
USD 101.34-105.01 (bullish)
Oil (WTI) 75.98-81.42 (bearish)
Gold 1 (bullish)
Silver 23.08-24.29 (bullish)
TSLA 112-182 (bearish)
Bitcoin 19,282-24,068 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
