This note was originally published at 8am on October 10, 2013 for Hedgeye subscribers.
“Failure is not fatal, but failure to change might be.”
As I was walking from one client meeting to another yesterday in Boston, I think I changed my US stock market view at least 3 times. Government sponsored volatility does that to a simple “folk” like me. Isn’t it cool?
What isn’t cool is not changing your mind. Especially when the causal factor that is driving the market’s immediate-term volatility is either Congress or the Fed, the best plan is usually accepting that the plan is going to change.
Does Big Government Intervention in your markets A) shorten economic cycles and B) amplify market volatility? In our Q413 Global Macro Themes call tomorrow at 11AM EST, we’ll show you the trivial data that answers that question. #OldWall media “Fed” story count vs Volatility (VIX) has a positive correlation that will make Bernanke’s “price stability” fans cry.
Back to the Global Macro Grind…
There’s no crying in risk management. So strap it on and keep moving out there. After watching this government gong show and changing my mind throughout the day, I ultimately opted to hit the buy/cover buttons into yesterday’s closing bell.
In other words, this is the first morning since Bernanke decided not to taper (September 18th) that I’ll be telling clients to buy-the-damn-dip. Unlike how I used to play this game (emotionally), this is purely a quantitative signal.
Other than salvation sent down to us from our overlords from upon high in D.C. (who will be saving us from themselves again), what’s changing this morning?
Yep, that’s about it. That (and US 10yr Treasury Yield holding @Hedgeye TREND support of 2.58%) is just about all this “ordinary folk” needs to see. Fading the false premise of a US “default” just puts a contrarian cherry on top.
But what shall I do if consensus sells the open and the VIX holds 18.98?
Nope, it’s not any more complicated than that. Remember, I’m just a paper trader newsletter guy who has to keep it simple as Zero Edge sells you some fear and Gold ads (gold nailed Fading Fear again btw - ZeroBid).
Context is always critical when making both asset allocation and net positioning decisions (I started the week net short). Don’t forget that buying US stocks here comes on the heels of a very basic pattern:
1. Dollar Down
2. Rates Down
3. Stocks Down
Oh, and volatility (VIX) up +70% from its August low.
Government sponsored volatility crushes confidence. US stocks have been down for 11 of the last 15 days on that and the only “UP” days have come on moves like you are seeing this morning:
Again, “keep it simple stupid.” That’s what my old hockey coach used to tell me when I’d try the howdy doody on a defenseman (I had really bad moves) instead of just driving to the net and firing the puck.
“Again!” –Herb Brooks
I’m definitely not saying “this is it!” Only people that don’t timestamp would say something ridiculous like that. All I am saying is that after a 4% correction from the all-time US stock market high (1725 SP500), the reward in buying stocks is in its highest probability position (versus the risk) in 3 weeks. SP500 has +23 handles of immediate-term upside to 1679 versus 1651 support.
And that’s all I have to say about that.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.61-2.71%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Takeaway: The shift from fixed income into equities continued last week with inflows into both stock fund categories and outflows across bond funds
Investment Company Institute Mutual Fund Data and ETF Money Flow:
Equity mutual fund flow snapped back after soft trends after the gridlock in Washington recently with a $2.9 billion inflow for the 5 day period ending October 16th, a reversal from the prior week's outflow of $3.1 billion. Total equity mutual fund trends reflect the shift from fixed income and into stocks with a $2.5 billion weekly average inflow thus far in '13 versus 2012's $3.0 billion weekly outflow
Fixed income mutual funds trends have been consistent with persistent outflows. This week's tally was another $5.7 billion lost in the category, an acceleration from the week prior's $2.5 billion outflow and now sending 2013's weekly average fund flow to a negative $687 million. This compares to the weekly inflow from last year in 2012 of $5.8 billion for fixed income funds
ETFs were a source of funds last week, with outflows in both equity and fixed income products. Passive equity products experienced outflows of $1.5 billion for the 5 day period ending October 16th with bond ETFs losing $1.7 billion during the same time period. ETF products also reflect the 2013 asset allocation shift, with the weekly averages for equity products up year-over-year versus bond ETFs which are seeing weaker year-over-year results
For the week ending October 16th, the Investment Company Institute reported the first simultaneous inflow into both domestic and world stock products in 4 weeks to the tune of $2.9 billion. This $2.9 billion inflow for the most recent 5 day period broke out to a $839 million subscription into domestic equity products, the biggest inflow in 5 weeks into domestic stock funds. The other portion of the equity inflow was into world equity products which booked a $2.0 billion inflow, the best result in 4 weeks for foreign stock funds. The equity category has been a tale of two tapes recently with domestic equity funds having had outflows in 8 of the past 14 weeks compared to international equity funds which have had inflows every week in the past 14. Despite this weak run in domestic stock fund flows, the year-to-date weekly average for 2013 for all equity mutual funds now sits at a $2.5 billion inflow, a complete reversal from the $3.0 billion outflow averaged per week in 2012.
On the fixed income side, bond funds continued their weak trends for the 5 day period ended October 16th with outflows accelerating week-to-week. The aggregate of taxable and tax-free bond funds booked a $5.7 billion outflow, just over double the $2.5 billion in investor withdrawals from the week prior. Both categories of fixed income contributed to outflows with taxable bonds having outflows of $3.8 billion, which joined a $1.8 billion outflow in tax-free or municipal bonds. The taxable outflow in the most recent period, was the worst outflow in 6 weeks and the muni redemption was the largest in 5 weeks. While the sharp outflows that marked most of the summer and the start of the third quarter have moderated, the appetite for bonds has hardly rebounded. The 2013 weekly average for fixed income fund flows is now a $687 million weekly outflow, a sharp reversal from the $5.8 billion weekly inflow averaged last year.
Exchange traded funds experienced soft trends last week with both equity and fixed income products booking marginal redemptions. Equity ETFs lost $1.5 billion in funds, an improvement from the $4.7 billion outflow the prior week. Despite these outflows the past two weeks within equity ETFs, the 2013 weekly average equity trends is averaging a $3.0 billion weekly inflow, an improvement from last year's $2.2 billion weekly average inflow.
Bond ETFs experienced another weekly redemption of $1.7 billion, the third week in a row of outflows and slightly worse than the $1.3 billion lost the 5 days prior. Including this most recent redemption within passive bond products, the 2013 weekly bond ETF average is flagging at just a $275 million inflow, much lower than the $1.0 billion average weekly inflow from 2012.
Jonathan Casteleyn, CFA, CMT
Joshua Steiner, CFA
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TODAY’S S&P 500 SET-UP – October 24, 2013
As we look at today's setup for the S&P 500, the range is 26 points or 1.05% downside to 1728 and 0.44% upside to 1754.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
“The will of man is not shattered, but softened, bent, and guided…”
-Alexis de Tocqueville
If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.
“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”
Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.
Back to the Global Macro Grind…
The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.
Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.
I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.
How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.
So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?
1. Down Dollar
2. Rates Falling
Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.
Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).
What else has been working this week?
Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.
This has never happened before… that’s why it “enervates, extinguishes, and stupefies people.”
Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.
Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?
Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?
2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.
I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.47-2.60%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.