McCullough's Morning Macro Note

Takeaway: There’s a big difference between consensus being bearish and Mr. Market’s bullish opinion.

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McCullough's Morning Macro Note - bu1

MACRO GRIND

After another shatteringly strong string of US economic data points (starting last Thursday with US roiling jobless claims hitting another YTD low and culminating with a blockbuster New Orders component of yesterday’s ISM report for August), yesterday’s US stock market ripped a +1% morning move to the upside and Treasury bonds continued to collapse.

Up for the 4th consecutive week, another #StrongDollar move was nipping on the heels of #RatesRising too. Consensus isn’t positioned for that, so I loved it. Then, all of a sudden, the most bearish catalyst of all hit the tape – a US politician’s opinion.

In the last year, there have been very few market risks that have scared me more than US central planners intervening during critical periods of market entropy. Going back to November of 2012 (when bond yields bottomed), Boehner’s voice was as market bearish as any you could find. He was the bearish factor yesterday too – the whole thing is just plain sad to watch.

Back to the economic gravity part…

  1. New Orders (in the ISM report for August) hit a monster shot of 63.2! yesterday (vs 58.3 in July)
  2. Go back to 2003 (see Chart or The Day) and look at how quickly economic gravity shocked growth bears to the upside
  3. Not unlike 2000-2002, consensus has become shatteringly bearish about growth; it’s a lagging indicator

To be clear, there’s a big difference between consensus being bearish and Mr. Market’s bullish opinion. While yesterday’s intraday gains in the SP500 were cut in half, the decliners were led by the slow-growth sectors (gainers were once again all about growth):

  1. Slow-Growth Utilities (XLU) got smoked again (after being down -5% for AUG), leading losers on the day at -1.2%
  2. Dividend Yield Chasing Consumer Staples (XLP) were down -0.1% in an up market as well (XLP -4.5% in AUG)
  3. Nasdaq (QQQ) +0.63% and Financials (XLF) +0.9% led gainers, as they have throughout 2013

In other words, if you are bummed out about Kimberly Clark (KMB) or Kinder Morgan (KMP) not getting you paid on the principal appreciation side of the equation, that’s just too bad. This Bernanke Yield Chaser style factor was as much a bubble as Gold was.

#RatesRising for the right reasons (growth expectations rising), is public enemy #1 for overvalued, slow-growth, securities. Whether it feels right or not, money chases positive returns. It flows away from draw-down risks.

Since I’m already out of everything Commodities, Fixed Income, and Emerging Markets (0% asset allocations), I have had relatively low stress on the draw-down risk side of big macro asset class moves in 2013 (Gold bounced, but is still -17% YTD and bonds are getting smoked), but that doesn’t mean I can afford to give up a lead for the sake of being beholden to this great growth data.

There are 3 big Macro things that would get me out of being long growth equities:

  1. If #StrongDollar snaps its long-term TAIL risk line of $79.11
  2. If #RatesRising stops and the 10 yr UST Yield breaks 2.44% @Hedgeye TREND support
  3. If #GrowthAccelerating Style Factors (like Nasdaq diverging from the Dow) reverse and break TREND

Johnny one-time Boehner’s intraday comments mattered because they kept the #1 risk to what’s been strong US consumption growth in play. It’s called an Oil tax at the pump. And Putin likes it.

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