This note was originally published at 8am on December 06, 2013 for Hedgeye subscribers.
“All progress comes from the creative minority.”
So, US GDP Growth goes from 0.14% (at this time last year) to 3.6% in Q3 of this year, and all I hear consensus whine about are “inventories.” I wonder if that slope of US #GrowthAccelerating’s line had anything to do with the long-end of the yield curve being up +127 basis points (or Gold crashing) year-over-year…
Newsflash: businesses build inventories when confidence is rising. These are called coincident indicators. Both the US Dollar and US interest rates peaked in Q3 – so did US consumer and business confidence. So the I (Investment) in C+ I + G = GDP, went up.
Would the 2013 growth bears have preferred Investment to go down (and G (government) spending to go up instead)? Who knows. And who actually cares what they think anyway? For them, it’s all rear-view. Mr. Macro Market looks forward.
Back to the Global Macro Grind…
Now that Bond Yields ripped to a lower-high (vs the SEP 2013 high) on a lagging economic indicator (that was a Q3 GDP report; it’s the end of Q4), and the stock market had another little meth withdrawal on that (“taper-talk” drives them batty), what’s next?
- TREASURY YIELDS = immediate-term TRADE overbought at 2.88% on the UST 10yr
- US EQUITIES = immediate-term TRADE oversold at 1779 on the SP500
- US EQUITY VOLATILITY (VIX) = immediate-term TRADE overbought at 15.58
So, would a bad jobs report be good for stocks (and bad for bonds)? Would another good jobs report be bad for stocks (and good for bonds)? Inquiring “lower-class folks” who don’t get to play at the insider Fed Whale tables want to know…
We mince no words calling this a centrally-planned-casino at this point. And since some of us are pretty darn good at buying bubbles, we feel lucky when stocks and bonds hit the high and low-ends of our risk ranges. It’s all about playing the probabilities, baby!
That’s why, after 5 consecutive no-volume down days for the US stock market (a correction in the SP500 of -1.2%), we bought-the-damn-bubble #BTDB (again) yesterday, taking our Cash position (asset allocation model) down to 38% (started the wk at 58%).
Where do we think US Growth goes from here?
That might be the easiest question to answer since we said US growth would go UP (from 0.14%) 1-year ago.
What could happen if we’re right about that?
- 2014 #OldWall GDP and SP500 consensus will be wrong (again) because it’s taking “forecasts” UP (it’s called anchoring)
- Most rear-view macro investors will probably perpetuate one more series of US stock market tops
- #GrowthSlowing, sequentially (from 3.6%) starts to give the US stock market multiple compression by Q2 of 2014
As most of you know, I’m not a forensic-US-stock-market-multiple-analyst. In fact, I think picking an “earnings number” for the SP500, then licking your finger on what multiple to slap on that is one of the more laughable things I hear people say with a straight face.
I’m more of a market history, math, and behavioral mutt myself. And history tells you that the US stock market:
- Sees multiple expansion when A) GROWTH accelerates and B) INFLATION slows
- Sees multiple compression when A) GROWTH slows and B) INFLATION accelerates
In other words, US economic STAGFLATION periods (1970s, 2010-2012, etc.) saw the SP500 trade at 7-12x earnings and #StrongDollar (deflating the inflation) periods of US real-consumption GROWTH accelerating saw multiples trade anywhere from 17-35x earnings.
Therefore, in my own little mind, provided that I think I know where the slopes of the 2 lines (GROWTH and INFLATION) are going in the next 3-6 months, I can start to prepare the sails of change in my positioning. In Macro, mental flexibility is forward progress.
Our immediate-term Risk Ranges (with TREND bullish or bearish) are now:
UST 10yr Yield 2.77-2.88%
Happy b-day to my brother Ryan and best of luck out there today,