This note was originally published at 8am on December 02, 2013 for Hedgeye subscribers.
“If a science has an adjective, it probably isn’t a science.”
As far as American physics goes, California’s Richard Feynman was as cool as cool gets. Above and beyond his brilliant contributions to the field, Feynman was a great communicator. His ability to teach reminded us how well he understood the subject matter.
Just before he passed away in 1988, Feynman left us with some behavioral thoughts and life lessons. One of the two books he published during the year of his death was titled What Do You Care What Other People Think?
“The book’s title is taken from a question his first wife, Arline, often put to him when he seemed preoccupied with his colleague’s opinions about his work.” (Wikipedia) Is there a better question for how your portfolio is positioned, every day?
Back to the Global Macro Grind…
I certainly hope you don’t care what most “economists” think about your portfolio. But I highly suggest you respect what Mr. Macro Market thinks. He can save you from missing the big obvious stuff.
One of the glaringly obvious things you should have cared about in 2013 was Mr. Macro Market’s phase transition to bucking up for GROWTH as an investment Style Factor. With the SP500 closing up another +2.8% in November, here are the YTD growth scores:
- LOW YIELD (Higher Growth) Stocks +41.3% YTD (vs High Yield, Slower Growth, Stocks +15.8%)
- TOP 25% EPS GROWTH Stocks (by SP500 quartile) +39.2% YTD
- HIGH BETA Stocks +37.9% YTD (vs Low Beta +23.3%)
- NASDAQ and Russell2000 +34.5% and +34.6%, respectively, YTD
- GOLD -25.9% YTD
In other words, being long the Gold Bond thing didn’t work like it did during the pervasively SLOW GROWTH 2010-2012 period of A) Interest Rate Repression B) Dollar Debauchery and C) Bernanke’s Policy To Inflate.
All it took to get growth expectations up (i.e. priced by Mr. Macro Market) were:
- US Dollar that didn’t go down (US Dollar Index peaked at +6% YTD in July)
- Tapering Expectations = #RatesRising
- US GDP #GrowthAccelerating
Oh, and you needed all 3 of those things to happen, all at the same time. In the absence of central planners trying to get in gravity’s way, even Keynesian “economists” call these pro-growth cycle moves “coincident” indicators.
No matter what the #EOW (end of the world) consensus view on US growth was 1 year ago today (when consensus “economists” expected +1.6% US GDP Growth and SP500 of 1528 for 2013), here we are – tracking closer to +3% US GDP growth and SP500 = 1800.
What did you care if #OldWall was off on GDP by almost 50% and the SP500 by 272 points? And what do you care about where consensus is today? Do you all of a sudden “buy growth”? Or is now precisely the time you should start to get out?
Using the same Hedgeye playbook (our GIP Model: Growth, Inflation, Policy):
- US GROWTH: odds that the slope of US Growth’s acceleration peaking in Q313 are rising
- US DOLLAR: whatever was left of USD strength continues to erode (down for 3 consecutive weeks)
- US RATES: 10yr Yield is signaling a lower-high vs the YTD high in US growth expectations (SEP 10yr of 2.97%)
All the while, from a purely quantitative modeling perspective, the SP500:
- PRICE is making higher-highs now on decelerating VOLUME (not good)
- VOLUME is trending down -9-14% versus our TREND based average into the “all-time highs” (not good)
- VOLATILITY (VIX) front month VIX continues to make a series of higher-lows (not good)
Up PRICE on down VOLUME and rising implied VOLATILITY as lagging GDP and employment data jams people into chasing the highs? Isn’t that just peachy.
But what do the central planners perpetuating Down Dollar and Rate Repression from here care? What do you care? Sadly, US currency and rate markets were only allowed to trade “freely” until the said “scientists” at the Fed said no-taper (SEP 18th), after all.
Our immediate-term Risk Ranges are now:
UST 10yr Yield 2.70-2.81%
Best of luck out there today,