Last of the Mohicans?

Takeaway: What an epic 48 hours it has been. Just. Total. Chaos. The reality? Everything is playing out precisely how it should have played out.

Last of the Mohicans? - mohicans

 

What an epic 48 hours it has been.  Just. Total. Chaos.

 

We are officially going over the “Waterfall” now. Boats are in midair. People are hanging on trees. Everybody is scrambling, trying to explain what they missed. Trying to make sense out of it all. Hat tip to Bernanke-sponsored bedlam with a big assist from our Central-Planning Fed Overlords.

 

The reality? Everything is playing out precisely how it should have played out.

 

If you’re data-dependent, if you have a rigorous quantitative process backing the research (God forbid), this was a fairly straightforward call to make. US growth has been accelerating as we have been saying all along (well ahead of consensus).

 

Here are the facts: US economic data stabilized from December 2012 through March 2013. From April to June, growth accelerated. On June 18th the Russell 2000 hit an all-time high. Yesterday, on June 19th, the Fed basically repeated all of this and outlined their view on tapering. Cue market mayhem.

 

All of these market dislocations (Treasuries, commodities, etc) were percolating underneath the surface of consensus well before yesterday and today’s frenzy.

 

The reality is that gold is crashing. Treasuries are crashing. Oil is crashing. As far as gold is concerned, the number one thing that has it down on its knees is rising bond yields. If you’re selling gold today, I don’t know what to tell you. Sorry? Gold could eventually go down to $800 for all I know.

 

This huge selloff we’re witnessing in gold, Treasuries and emerging markets – we are in the early innings of what could be a long-term macro trend.

 

Last of the Mohicans? - mohicans2

 

Turning our attention to the rest of the world: What a disaster. Asia is a bloody mess. Go back to the tapes, we’ve been sounding the alarm here for a while now. Asian markets overnight were a debacle with the Weimar Nikkei “outperforming” its peers by only declining 1.7% (no, we still don’t like Japan).

 

As for China—just nasty. I don’t know what else you would call it. Meanwhile, the Hang Seng is down 14.4% since the end of January. Now it’s not as nasty as Brazil, or Russia, but it’s pretty darn nasty. India down 2.9%; Indonesia down 3.7%. Even though we like the Philippines, (it’s an interesting micro story within the broader disaster which is Emerging Markets) we sold that as well. We realized the research there was going to be trumped by the risk management signal.

 

You can’t be dogmatic in your stance. When the macro flows take over, get out of the way.

 

Europe? It doesn’t look good, either. That’s not new. Now if the DAX trend line at 8013 breaks, that would definitely be news. That is a critical line. Most trend lines in Europe are broken. The FTSE just broke its trend. So if the DAX breaks, there will not be one—not one—out of the 86 countries whose equity markets we follow that will have held its trend line, other than the US stock market.

 

Investors are running out of places to put their money. So in a sense, the S&P 500 is the last of the Mohicans. Keep a close eye on the 1583 level on the S&P 500.

 

Now the question is at what point do growth expectations in equities get prices in? I don’t know the answer to that. That’s what we’ve been trying to convey recently. What we have been saying is number one: Don’t buy fixed income and don’t buy commodities or anything that we haven’t liked for six months. Number 2: Take down your equity exposure. That’s the risk management order of the day.

 

Ranting and raving about what has transpired these last six months is no longer my task. It’s history. Right now you take a deep breath. You wait and you watch.

 

One of the first things we’ll be buying is Financials (XLF). We like the Financials. Particularly with the yield spread at 211 basis points wide and climbing. That’s a very bullish indicator for the group. Your buy list should have a lot of financial names on it. After that, we’ll go to the old bailiwick which is consumption-oriented names in healthcare and consumer itself.

 

Keep an eye on that 1583 level on the S&P 500. It’s key. If that breaks, it’s bye-bye to the Mohicans.

 

(Editor's Note: This commentary comes from from Hedgeye CEO Keith McCullough's morning conference call. If you would like to learn more, please click here.)