This note was originally published at 8am on March 19, 2013 for Hedgeye subscribers.
“Let those flatter, who fear.”
Two years prior to penning his first draft of the Declaration of Independence in 1776, Thomas Jefferson wrote his first significant thought piece. That’s where the aforementioned quote comes from – it was called The Summary View (1774).
In addition to his comment about the British old-boy culture of backslapping, he went on to add that “it is not an American art. To give praise which is not due might be well from the venal, but would ill beseech those who are asserting the rights of human nature…” (Thomas Jefferson: The Art of Power, pg 74)
Less government, more economic freedom, and a strong currency – there is no praise to give those who fear these founding American principles. As corrupt Russians whine about getting taxed in Cyprus, think that through. What scares Putin should flatter us.
Back to the Global Macro Grind…
To fear, or not to fear – remains your risk management question. Clearly, living in fear of the US Equity Futures indicated down 20 handles was no way to live yesterday; buying on red was.
To review the lower-highs (see Chart of The Day) of Front-Month Fear (US Equity Volatility, VIX):
- December 28th, 2012: people freak-out on New Year’s Eve on a Congress concern; VIX down -41% since
- February 25th, 2013: 1-day freak-out over an Italian Election; VIX down -30% since
- March 18th, 2013: 1-hour freak-out over taxing money launderers in Cyprus; VIX down -11% from the open
In other words, from a Behavioral perspective, the stock market’s implied fear is:
A) Coming on lower-quality “crisis” story-telling
B) Becoming more and more short lived
No, I will not navel gaze with Old Media sources who make-up crisis stories in order to sell ad space. Instead, I will call them to account; especially if they are the same people who have missed this entire 4 month rally. It’s un-becoming.
There will be a time to fear the market’s internal signals. And while I am probably blind to them again this morning, there is nothing I can do about that. I go with my process, not the inevitable and humbling force that will be the market eventually going against me.
To review: there are 2 big parts to our process – the Research View and the Risk Management Signals. In terms of the Research View, the fulcrum point of our bull case since December has been #StrongDollar. It got stronger, again, yesterday – and:
- That makes this the 6th week in the last 7 of an up US Dollar Index, $82.79 last
- Commodities (CRB Index) have been down for 6 of the last 7 weeks, in kind
- Commodity Deflation keeps A) the Fed on hold and B) a Consumption Tax Cut in play
Good getting better in terms of US Consumption is good for a Q113 (vs Q412) sequential US GDP acceleration and, at the same time, the wealth effect on the two big things that matter (your house price and stock market portfolio) going up, at the same time.
What could go wrong? Well, that’s easy - the things that have been going right (US employment and housing). #HousingsHammer remains one of our Q113 Global Macro Themes, and we’ll be very interested to see this week’s US Housing data (Housing Starts come out today; Existing Home Sales/Inventory on Thursday). Jobless Claims on Thursday is important too.
All the while, the Global Macro Risk Management Signals continue to tick:
- Japan’s Nikkei held TRADE and TREND support and led Asian Equities higher last night, closing +2%
- China’s Shanghai Composite held TREND support (2206) and rallied +0.8%, making another higher-low
- South Korea’s KOSPI recovered TREND support (1975) after dipping below it on Cyprus fears (for a day)
- Germany’s DAX continues to hold a Bullish Formation (Russian mob footing bailout bills is good for Merkel)
- Russia’s RTSI stock market index continues to break down (bearish TREND), down -12% since topping in JAN
- Brazil’s Bovespa remains bearish TREND as well (Commodity Stock markets are not like Consumption ones)
- Gold failed at its 1st major line of resistance (TRADE = $1605, TREND $1659, TAIL $1681)
- Treasury Yield (UST 10yr) held TRADE support (1.91%) and long-term TAIL risk support of 1.84% remains intact
- Japanese Yen (vs USD) failed at TRADE resistance (93.65) and remains in a Bearish Formation
- US Equity Volatility (VIX) failed at 14.46 TRADE resistance and remains in a Bearish Formation
Net, net, net – what all this means is that chariots of Cypriot fire haven’t changed the view we’ve held since December. In fact, they’ve improved it. Don’t forget that money leaving Europe and Japan goes somewhere. US currency and equity finally has the flows.
Will we get run-over by a legitimate market fear? For sure – I just don’t know when (so let me know, if you know!). In the meantime, we want to be long of growth (Asian and US Stocks) and short of fear (Gold, Treasuries, Yen). It’s been a flattering position.
Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1569-1605, $107.74-109.93, $82.14-83.13, 93.65-97.10, 1.93-2.02%, 10.77-14.46, 941-958, and 1539-1566, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer