Conclusion: Economic growth is slowing at a slower rate, which is a leading indicator for accelerating growth. As such, we’ve decided to part ways with the flattener.
Earlier this morning, Keith booked a rather sizeable gain vs. our cost basis in the Hedgeye Virtual Portfolio via a sale of the iPath U.S. Treasury Flattener ETN (FLAT). Having held the position since late FEB ’11, our use of the time-tested buy-and-hold technique was driven primarily by our once highly-contested belief that:
- U.S. economic growth was slowing based on our PTA analysis… supported by Reinhart and Rogoff data (sovereign debt structurally impairs growth beyond 90% of GDP);
- Consensus (both sellside and buyside) estimates for U.S. economic growth were going to be dragged dramatically lower as the data came in light; and
- The U.S. Treasury yield curve would flatten from a near all-time wide as a result of #1 and #2.
As a result of point #3, the FLAT ETN finished 2011 up +26.8%.
Looking ahead to the game that’s in front of us, our process continues to focus on the slope of growth – rather than the absolute – as macro markets continue to be driven by slopes, spreads, probabilities, and ranges, NOT neatly-wrapped full-year growth and inflation targets. We’ll be discussing these modeling concepts in greater detail on our 1Q12 Themes Call next Wednesday; for now, refer to Howard Penney’s Early Look from yesterday for more on this subject.
From a slope perspective, U.S. economic growth is still slowing. It is, however, slowing at a slower rate than before, which means that the intermediate term slope of probable economic growth scenarios is flattening out (no pun intended). While certainly not an outright bullish catalyst for beta, it is decidedly less bearish than it was a year ago.
Bottoms, like tops, are processes, not points.
What would get us to start sending emails titled: U.S. Growth Accelerating?:
- Further strength in King Dollar, which has shown a positive correlation to improving labor market trends over the past 40-plus years of data;
- Further Deflating of the Inflation as a result… a direct benefit to the “C” in the C + I + G + NetExp equation (i.e. ~70% of the total);
- Quantitative confirmation of the Bullish Formation in U.S. equities in the Treasury bond market… key yield breakout/FLAT breakdown levels to watch are included in the charts below.
Until then, manage the immediate-term risk associated with the proactively predictable game of tug-o-war between perma-bulls and perma-bears that occurs at every top or bottom.