This note was originally published at 8am on January 07, 2014 for Hedgeye subscribers.
“I just lied to someone else, but you can trust me because I’d never lie to you.”
That was an excellent quote John Hamm used to discuss “implied distrust” in a solid chapter in Unusually Excellent titled “Being Trustworthy.” We are who we are – and, as a new Wall Street evolves, our goal is to be a 2.0 research source you can trust.
“Be honest… Be vulnerable… Be Fair… “ (Unusually Excellent, pg 36) – these are some of the simplest rules of relationship building, yet some of the most difficult to rinse and repeat each and every market day.
Trust isn’t allocated in this profession. It’s earned, daily.
Back to the Global Macro Grind…
With a polar vortex rolling through the USA and Florida State coming back from 21-10 at the half to win the championship (with 13 seconds left) last night, does anyone really care that the US stock market closed down 25 basis points yesterday?
Is this going to be another 1-2% correction in US stocks, or the beginning of yet another #EOW (end of the world)? I need to make some real-time asset allocation decisions around the answer to that question. So I’m not going to lie to you – I bought-the-damn-bubble #BTDB on red again yesterday.
I’ll go through the why on that in a minute, but first, here’s how I’ve re-positioned in the 1st three days of 2014:
1. Dropped CASH in the Hedgeye Asset Allocation Model from 50% to 30%
2. Raised my allocation to International FX from 27% to 30%
3. Raised my allocation to International Equities from 10% to 18%
4. Raised my allocation to US Equities from 10% to 16%
5. Raised my allocation to Commodities from 3% to 6%
6. Moved to 10 LONGS, 5 SHORTS in #RealTimeAlerts (vs 5 LONGS, 5 SHORTS on January 1)
Nope. I’m not going all wild and crazy, investing all the cash at the all-time highs in US Equities. That’s not how I roll. I’m a gradualist, of sorts. I like to work my way into a situation that appears to be developing. If it stops developing, I stop.
To be clear, buying into some spotty US #GrowthSlowing data doesn’t exactly fire me up. But buying at the low end of my SP500 risk range does. And I’ll do more of that, every time the process tells me to.
Unlike the ISM Manufacturing report for DEC (which was solid and did not slow), yesterday’s ISM Services (non-manufacturing) print was what it was, slowing on the margin versus its 2013 peak. Let’s break that down a little further:
1. ISM Services headline slowed to 53.0 in DEC vs 53.9 NOV (I know, the horror of it all)
2. New Orders in the ISM Services report slowed faster to 49.4 DEC vs 56.4 NOV (not good)
3. Business Employment in the report ACCELERATED to 55.8 DEC vs 52.5 NOV (good)
So… with the stock market red on the headline slowing (marginally – but that’s the point about what happens on the margin, it matters) I didn’t just start buying blindly. Instead, this is how I thought about it:
1. LEVELS: SP500 tested the low end of my immediate-term TRADE range (1822-1848) – that’s a buy/cover signal
2. TIMING: the next calendar catalyst is the US Employment Report on Friday
3. DATA: Friday’s employment data could easily rhyme with strength in the ISM (services and manufacturing) reports
Since I don’t just do US stocks, I also thought through how this could play out across multiple-factors:
1. BONDS: US 10yr Treasury Yield weakened on the ISM Services headline but held all lines of @Hedgeye support
2. GOLD: strengthened on weaker data + rates falling; that’s how Gold is trading now (but failed @Hedgeye resistance)
3. DIVERGENCES: Financials (XLF) made new highs (+0.23% for JAN) vs Utilities (XLU) down -1.69% JAN
That last point is a sneaky one. Stocks that look like bonds (slow-growth, high dividend yield) continue to act like dog breath (the smell of that doesn’t lie either!).
And while our model will score Friday’s employment for what it is (a lagging economic indicator), if it’s bullish I think it will be bearish for Gold, Bonds, Utilities, etc. relative to both growth and inflation expectations.
If I didn’t think that, I wouldn’t be re-positioning this way in real-time. That’s the beauty of the #timestamp. Whether it ultimately proves to be right or wrong, my positioning doesn’t lie to me.
UST 10yr Yield 2.96-3.05%
*all 12 macro ranges are in our Daily Trading Ranges product
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer