Flows Follow

This note was originally published at 8am on February 04, 2013 for Hedgeye subscribers.

“You have to be the first one in line. That’s how leaders are born.”

-Ray Lewis

 

Did global growth stop slowing in mid-to-late November? Is #GrowthStabilizing bad for Gold and Bonds? These questions are now rhetorical ones.

 

When you want to win a game, you have to teach. When you lose a game, you have to learn.” -Tom Landry

 

Our congratulations to Ray Lewis and the Baltimore Ravens. #winning

 

Back to the Global Macro Grind

 

US Equities were up for the 5th consecutive week and long-term US Treasury Yields continued to breakout to the upside last week (10yr Yield up another +6bps to 2.01%) as fund flows into US Equities continue to surprise on the upside.

 

How did this all happen so fast?

  1. Sentiment was bombed out in mid-November and short interest was high
  2. Fundamental global economic growth data steadily improved for 2 consecutive months
  3. Equity Fund Flows Followed

The 1st two points of the process were trivial. We wrote about them every day. The last point about flows was the hardest to nail down. While we usually get the memo on flows after the fact, we do know what leads them.

 

Q: What leads people out of Gold/Bonds and into Equities? A: Growth Expectations.

 

Example (Gold):

  1. Gold made a long-term lower-high in mid November at $1755/oz (versus the all-time high in 2011)
  2. Gold snapped our intermediate-term TREND line of $1698 in early December
  3. Gold net long positions (futures and options contracts) crashed to 82,081 last week

Crashed? Yes. Last week the bulls (who had been buying Gold contracts the whole way down from October to January) capitulated, selling the net long position in Gold contracts down -24% wk-over-wk.

 

Despite Gold and Silver being down another -0.2% and -1.1%, respectively, this morning, from an immediate-term TRADE duration perspective this is obviously an interesting contrarian indicator. But what does it tell you about longer-term growth expectations?

 

What has the Treasury Bond market been telling you?

  1. 10yr US Treasury Yields made higher-long-term lows in November-December in the 1.57-1.61% range
  2. 10yr US Treasury Yield broke out above our intermediate-term TREND line of 1.73% in mid-December 2012
  3. 10yr US Treasury Yields are up another 5 basis points this morning (that’s a lot in a day) to 2.05%

At the same time, the HYG (High Yield) and Junk (JNK) Bond ETFs finally broke my immediate-term TRADE lines of support last week. With Investment Grade and Junk Bond yields up another +1.9% and +3.3% last week, that was new for this cycle (not new at turns in other major cycles).

 

The concept of buying “High Yield” debt (that has record low yields) is far from simple; especially if people start to bake in that Ben Bernanke’s money printing days are over. This is why we are so focused on the slope of growth expectations for:

  1. Global GDP Growth
  2. US Employment Growth
  3. US House Price Inflation Growth

All 3 of these factors can drive Gold/Bond prices down until people actually start to believe we could re-flate the Commodity Inflation Bubble (which peaked alongside Gold in 2011). Which, in turn, could slow growth (again). That’s why:

  1. CRB Commodities Index closing 1 point inside of our long-term TAIL line of 306 last week is a NEW concern
  2. Oil Prices up another +1.8% and +2.9% on WTIC and Brent last week are a mounting concern
  3. 5-year Breakevens up +6.5% last week in the US (Bernanke’s former inflation expectations bogey) matter too

Whether you were bullish or bearish throughout this 2-month move doesn’t matter anymore. Today is a new day. You are either first on the line to register what is changing on the margin in macro, or you are not. We’ll do our best to stand alongside you.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1676, $114.19-116.87, $79.01-79.71, $1.34-1.36, 90.67-93.12, 1.96-2.11%, and 1498-1517, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Flows Follow - Chart of the Day

 

Flows Follow - Virtual Portfolio