This note was originally published at 8am on January 02, 2013 for Hedgeye subscribers.
“Our support goes to those who struggle to gain those rights or keep them.”
-Franklin D. Roosevelt
Our struggle in 2013 will be no different than the struggle we’ve endured for the last 5 years. Our struggle for economic freedom is intensely personal. Both parties have violated us. That’s why it feels as real as gaining or keeping our natural rights has ever felt.
In his State of the Union Address of 1941, Franklin D. Roosevelt united America and those fighting socialism/fascism in his “Four Freedoms” speech. On page 258 of The Last Lion, Paul Reid reminded me of this epic moment in American leadership:
“We Americans are vitally concerned in your defense of freedom… This is our purpose and our pledge… We look forward to a world founded upon essential human freedoms:
- “The first is our freedom of speech and expression…”
- “The second is freedom of every person to worship God in his own way…”
- “The third is the freedom from want…”
- “The fourth is freedom from fear…”
Obviously this is not WWII. But it isn’t the time to abandon our struggle for our freedoms and liberties either. Living in fear of a cliff that politicians create and perpetuate is no way to live. With America’s balance sheet under ideological attack, I submit these principles to you for your deliberation and debate. On this #KeynesianCliff of deficits and debt, you are the last line of defense.
Back to the Global Macro Grind…
To kick-off 2013, I need to do a better job communicating our process. For those of you new to it, there are two big parts: fundamental RESEARCH and quantitative RISK MANAGEMENT. Over the years, I’ve made enough mistakes to learn that I need to respect both. They aren’t always signaling the same thing. When they are, I have more conviction.
Quantitatively speaking, our read-through on the US stock market is bullish provided that the SP500 is trading above our intermediate-term TREND line of 1419. Our call on bonds (provided that 1.70% TREND support on the 10yr holds), is now bearish. That’s why I am starting 2013 with a 0% asset allocation to Fixed Income.
From a fundamental research perspective, for over a month now our Globally Interconnected Macro Model has been signaling an important shift from global growth slowing to #GrowthStabilizing. On the margin, that matters.
So does rising volatility associated with the US government being the market’s daily catalyst. The VIX went from up +22.4% last week to down -20.7% in a day (Monday)! If you nailed both sides of those moves, congrats. No one said our daily struggle was easy.
As a reminder, our long-term thesis on Big Government Intervention is that:
- It amplifies market volatility
- It shortens economic cycles
Point #1 is trivial. Point #2 less so. On that score, I think I confuse some people when I say growth, globally, has gone from slowing to stabilizing. The point in and of itself isn’t confusing as much as how I risk manage the market on that is.
Remember, the economy is not the stock market. So you can easily see a market rip as growth slows inasmuch as you can see it collapse as growth stabilizes. There’s no rule in markets that states they have to make sense. So keep moving out there.
#GrowthStabilizing RESEARCH and RISK MANAGEMENT signals of the day:
- British Manufacturing PMI for DEC shot back above the expansion line (50) to 51.4 vs 49.1 in NOV
- India’s Manufacturing PMI hit a 6-month high of 54.7 in DEC vs 53.7 NOV
- Italy’s PMI finally stopped collapsing, sequentially, registering an uptick to 46.7 DEC vs 45.1 NOV
- Indonesian inflation (CPI) joined that of South Korea’s, slowing in DEC to 4.3%
- South Korea’s KOSPI shot to higher-highs overnight (vs SEP highs), +1.7% to 2031 (bullish TREND)
- Hong Kong’s Hang Seng Index ripped another higher-high (vs SEP), up +2.9%
- Germany’s DAX is taking out its recent highs, +1.7% this morning (bullish TREND)
- Both Brazilian and Canadian stocks markets closed at bullish TRADE and TREND levels at yr end
- CRB Commodities Index remains bearish TAIL (306 resistance) – good for consumption growth
- UST 10yr Treasury Yields are flying higher this morn to 1.82% after holding 1.70% TREND support
Of course, there’s always bearish growth data somewhere (German Manufacturing PMI slowed sequentially to 46.0 DEC vs 46.8 in NOV and Brent Oil is inflating back above its TAIL resistance of $111.58/barrel). But that’s not enough to knock me off this #GrowthStabilizing puck.
From these implied multiple expectations, the most bearish fundamental research factor affecting US Equity and Bond markets (on both a relative and absolute basis) compared to China and Germany is crystal clear: Congress.
And unless Our Struggle ends in victory versus these Keynesian quacks who get paid to lever your country up with debt and deficit spending, this short-term economic growth pop will be as short-lived as every one that’s come before it since 2008.
Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1637-1689, $109.99-111.89, $79.21-79.98, $1.31-1.33, 1.73-1.85%, and 1419-1453, respectively.
Best of luck out there in 2013,
Keith R. McCullough
Chief Executive Officer