This note was originally published at 8am on January 15, 2014 for Hedgeye subscribers.
“Come to me, that I may give your flesh to the birds…”
Allegedly, that’s what Goliath said to David, before taking a sling-shot rock to the melon – and dying, epically, in front of his fans circa 1000 BC. It probably felt something like how Captain Top Caller of the US stock market has felt now, for a year. #Boom
I got the quote from reading the 1st fifteen pages of Malcolm Gladwell’s latest pop culture book, David and Goliath. I’m only a third of the way through the book, but it gets pretty underwhelming after that. Malcolm’s bullish momentum has slowed.
“Should I play by the rules or follow my own instincts? Should I persevere or give up? Should I strike back or forgive?” (David and Goliath, pg 5). Irrespective of how the rest of his book goes, Gladwell’s opening questions spoke to me. In the arena that is Wall Street I’m a fighter, not a lover. Failing in front of my growing family and firm is not an option. I need to constantly evolve.
Back to the Global Macro Grind…
Are there hard coded rules to risk management? Or should you have none and just trade on your emotions? Should we spend our days striking back at Mr. Macro Market’s real-time signals, or embrace them?
“When he first sees David, his first reaction is to be insulted, when he should be terrified. He seems oblivious of what’s happening around him.” (David and Goliath, pg 13) So, don’t be Goliath (especially if Mr. Macro’s real name is David; he’s everywhere).
I am just Mucker. I don’t tell the market to come to me. The market tells me where to go. And while I can be prickly and moody about it sometimes, I eventually obey.
BREAKING: “SP500 Has Year’s Biggest Gain On Retail Sales, Mergers” –Bloomberg
But, but… yesterday’s headline (the aforementioned one and it are still side by side in the “Most Popular” (most read) of Bloomberg.com) said “SP500 Falls Most Since November Amid Valuation Concern.”
So which one is it? *hint (neither)
Macro markets don’t move that way. That’s because there usually is no single factor model (like “valuation”) that saves you from having to do the real work. That’s what macro is – history, math, and behavioral – and it’s one hell of a grind.
Not to pick on one of the Goliaths of financial market “news”, but US Retail Sales actually slowed, sequentially, to 0.2% in yesterday’s report – and that’s in line with the shift we have been calling for here in the USA as:
1. US Consumption Growth Slows from its Q313 sequential highs
2. US Inflation Expectations Rise from their Q413 sequential lows
Macro is obviously multi-duration and multi-factor, but focusing on the big stuff (Growth and Inflation) matters more than someone’s qualitative view about why someone failed at Brown (Gladwell’s book) or a magic multiple for stocks (Old Wall).
That’s just #history and #math. The more you study both, the more you realize you have to learn. Especially on the Correlation Risk (#math) front, you actually have to re-learn what #history may already be able to contextualize.
From a #behavioral perspective, how many market mavens have tied everything together for you in a baby blue Tiffany box? Our team is constantly searching for clues, correlations, and causalities on human behavior. Like markets, they evolve too.
What do you think matters more to macro markets, A) confidence or B) valuation. I’ll go with A).
Without confidence in:
1. Growth Accelerating (sustainably)
2. Inflation being under control (as opposed to what the government tells you it is)
3. The strength and credibility of a government’s balance sheet, income statement, and currency
You will not have sustainably strong equity market multiple.
That’s why the greatest threat to the US stock market is a reversal of what gave the market its first taste of multiple expansion in half a decade – a #Strengthening US Dollar, #GrowthAccelerating, #DeflatingTheInflation, and #Rates Rising.
Instead of reading the Bloomberg headlines, here’s what actually happened in the last 2 trading days:
1. SP500’s Biggest Down Day since NOV 7, 2013 = Dollar Down, Rates Down, Stocks Down
2. SP500’s Biggest Up Day of 2014 = Dollar Up, Rates Up, Stocks Up
So come to me #StrongDollar, or I will re-allocate capital to countries who don’t play by the rules of the Federal Reserve and a tired Western Keynesian academia. If this time is different, and I fail to evolve my positioning – may my flesh be fed to the birds.
Our immediate-term Macro Risk Ranges are now as follows (all 12 Macro ranges are in our Daily Trading Range product):
UST 10yr Yield 2.79-2.94%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer