“Courage is rightly esteemed the first of human qualities because it guarantees all others.”
That’s a quote from Churchill in “Great Contemporaries” that is cited by Paul Reid in the preamble to The Last Lion. “He believed in virtue and right … he taught himself well and created a code he could live by.” (page 23)
While I don’t think there are any words I can write to comfort families in my neighboring town of Newtown, CT, I just wanted to take time this morning to say that they are in our thoughts and prayers.
Back to the Global Macro Grind…
US stocks closed down for the 2nd consecutive day on Friday, taking their 2-day correction to -1%. Despite the fanfare of “stocks being up YTD”, US stocks have been weak since mid-September. For Q4 of 2012, the SP500 and Nasdaq are down -1.9% and 4.7%, respectively.
Where do we go from here?
If it wasn’t for Apple (AAPL) and #EarningsSlowing (Schlumberger, the #3 component of the Energy Sector ETF (XLE) guided down on Friday), everything would be pseudo-fine this morning. But you can’t back those things out – they are big things.
So is the Global Growth Cycle – and while we aren’t raging bulls suggesting that growth is back, we are seeing the causal factor that stabilizes global economic growth (Commodity Price Deflation) start to take hold where it matters most – price and expectations.
On the expectations front, check out last week’s CFTC Futures and Options net long positioning in commodities:
- Total Net Long commodity contracts fell another -11% wk-over-wk to 802,817
- Net long commodity contracts continue to crash from their all-time high (SEP 2012), down -40%!
- Sugar contracts had their biggest 1 wk drop in 5 years at -68% last week to 6,056 contracts
- Wheat contracts plummeted -67% wk-over-wk to 11,219 net long contracts
- Oil net long positions were down -21% wk-over-wk (biggest drop since May)
- Farm Goods dropped another -10% in the aggregate to 484,088 net longs
While expected commodity deflation is crystal clear in the futures/options market at this point, prices and expectations don’t always agree. Gold is the not-so-shining example of that statement:
- Gold bets actually keep going up as the price goes down (price = down for 3 straight wks; net longs up for 4 of the last 5 wks)
- Net long contracts in Gold went up another +3% last week to 129,865
- Gold is down another -0.33% this morning to $1690, and remains bearish TRADE and TREND in our model
With Gold’s TRADE and TREND resistance overhead at $1709 and $1719, respectively, this makes for an interesting debate (ask for Darius Dale’s Gold research note from Friday if you didn’t read it). Long-term TAIL support of $1670 is the only big line left of support for Gold. If that holds, consensus bets on the net long side could be ok, but only if they own the right strikes.
If Gold’s TAIL breaks, watch-out below.
That’s how we thought about AAPL (see Chart of The Day, TAIL = $561). That’s how we think about TAIL risk. We have a line that moves dynamically as price/volume/volatility does, and we use that as our headlights. Is the probability of incremental risk rising or falling? That’s another way to simplify how we think about that. It’s not perfect, but it’s a consistent risk management code I can live by.
If you go back to the 3-factor Global Growth Model I’ve been calling out for the last 3 weeks:
- Chinese stocks (Shanghai Composite)
- Bond Yields (US Treasuries)
There’s emerging evidence that supports a shift from global #GrowthSlowing to #GrowthStabilizing. We’re not wedded to this – we’re just courageous enough to embrace the market’s uncertainty and change our minds as markets suggest we do.
Bond Yields had a big move last week with the 10yr Treasury Yield not only rising from 1.62% to 1.70% on the week, but closing above my TREND line of 1.69%. This morning, the 10yr yield is up another 2 basis points to 1.72%, confirming the move.
That’s also bearish for Gold. Rising bond yields always have been bearish for Gold because they compete with the long-standing expectation of #GrowthSlowing embedded in both Bond market and Gold bubbles.
On Friday, that’s why I cut our Fixed Income asset allocation to 0%, raised our Global Equities allocation, and stayed with what’s served us well since mid-September (0% asset allocation to Commodities).
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.71-108.93, $79.41-79.99, $1.29-1.31, 1.69-1.76%, and 1, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer