This note was originally published
at 8am on January 03, 2013 for Hedgeye subscribers.
“It is gone forever.”
That’s what legendary investor, Jeremy Grantham, started off his Quarterly Letter with in November. It was titled “On the Road to Zero Growth” and was published right around the time that the Barron’s cover read “Are We Headed For A Recession” (November 12, 2012).
I have a tremendous amount of respect for Grantham’s long-term TAIL risk work, but that doesn’t mean I always agree with him; especially on timing. For the last six weeks, our Global Growth Model has explicitly disagreed with A) a global recession and/or B) anything that remotely resembles 1% US growth, never mind 0%.
Since the mid-December cover of The Economist was titled “A Rough Guide To Hell”, I think being relatively bullish on stocks (and bearish on both Bonds and Gold) here is still the contrarian call to make. I don’t make calls on forever.
Back to the Global Macro Grind…
I’ll come back to the multi-duration, multi-factor, risk management support for the aforementioned research view in a few minutes. First, let’s just take a moment to respect what yesterday was – easily the most bullish 1-day move for growth expectations in at least a year.
- After holding its 1419 line of TREND support, the SP500 ripped to within 0.8% of its September 2012 intraday high
- The Russell 2000 closed up +2.9%, making an ALL-TIME higher-high at 873 (versus 865 in April of 2011)!
- Both VOLUME and VOLATILITY signals finally confirmed the PRICE moves – and it was broad based, across sectors
In our multi-duration S&P Sector Model, all 9 sectors are bullish on all 3 of our core risk management durations (TRADE, TREND, and TAIL) for the first time since December of 2011. We call those Bullish Formations.
Yes, in spite of the Fed and Congress – global growth stabilized as expectations for future Fed Intervention came down huge (CFTC Futures and Options net long contracts dropped -49.5% from their all-time top in September to the December lows).
Rather than using Grantham’s duration (his 0% growth forecasts extend out to the years 2030-2050 – yes, you can fire me if I ever try durations like that), let’s focus on where at least 90% of money managers have to focus on these days – the intermediate-term TREND.
- Let’s start with where US GDP Growth is at – at least +2-3%, not 0 to 1%
- You can get mad about how Obama is getting to +2-3% (spending), but you also have to understand it
- Government spending is tracking +9.5% on an annualized basis – that’s a big pop
*Reminder: GDP = C + I + G + (EX-IM). So, given that Congress just yard-saled the can on spending cuts, the G (government spending), is not going to be a headwind for Q113 GDP either. It might be in Q2 or Q3 – we’ll let you know when we think we know.
And a lot can happen in between now and Q2. What if the employment report tomorrow starts getting consensus thinking about a 6% handle on the US unemployment rate?
Oh, no you didn’t Bernanke – you didn’t take your “experimentation” too far in targeting random numbers now did you? What if Bernanke is what he usually is – wrong on his growth forecasts? What if unemployment rate expectations start to fall towards 6.5% in 2013 instead of in 2017? Inquiring Bond and Gold bulls would like to know…
I have no idea what the unemployment rate is going to be tomorrow – but what I can tell you is that:
- Yesterday’s Employment component of the US manufacturing PMI reading accelerated to 52.7 in DEC vs 48.4 NOV
- Weekly US Jobless Claims have been tracking well below our critical employment growth level of 385,000
- Both Bonds and Gold have been signaling this shift in employment growth stabilizing for the last 3 weeks
Again, this doesn’t mean I am bullish on US growth forever. To the contrary, what I am really telling you is to really respect that Big Government Intervention perpetuating short-term economic cycles works both ways.
Growth scares work just as well on the upside as they do on the downside. And if the market is sniffing this one out right, wouldn’t it be ironic and deserving, all at once, for Ben Bernanke’s latest policy expectations gamble to pop the biggest bubble of them all – bonds.
Fund flows out of bonds and into stocks would come back to this market in a hurry. The US stock market perma-bulls have been waiting for that train since 2007. If #GrowthStabilizing holds, that loco market machine may have already left the station.
Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1671-1690, $110.39-112.61, $3.61-3.77, $79.49-80.14, $1.31-1.33, 1.78-1.85%, and 1429-1474, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer