Destiny's Coincidence

“A thin line separates destiny from coincidence.”

-T.J. Stiles

That’s a great quote about a great capitalist by T.J. Stiles in The First Tycoon. Cornelius Vanderbilt was a Dutch boy who learned the ways of one of the most important waterways in world commerce from his family’s waterside farmhouse.

“Farm life has always tended to erode the line between childhood and adulthood. Cornele (his childhood name) lived a life of work and responsibility, hoeing and milking, piling and shoveling. There was church too.” (The First Tycoon, pg 19)

In other words, one of America’s most important self-made capitalists of the early 19^th century was a #grinder. He didn’t borrow to spend. He built things that made money. And he bought companies that he didn’t have time to build. He wouldn’t have been long of bubbles in social media terms.

Back to the Global Macro Grind…

What is the destiny of a bubble that #OldWall media refuses to call a bubble? With 74% of companies who have come public in the last 6 months not making any money (only eclipsed by the Nasdaq bubble of 1999 when that number was 80%), what could possibly go wrong?

BREAKING: Nasdaq -2.6% on Friday, snapping @Hedgeye TREND support of 4203

Risk happens fast. With the social media stock bubble crashing (single stock moves have been -20-45% from their all-time peak), the Nasdaq is already -5.3% off its YTD high. Since the SP500 is only -1.3% from her all-time-bubble closing high, it must be a bargain!

To review what last weeks snappy correction in the Nasdaq looked like within the context of everything else:

1. Nasdaq -0.7% on the week to -1.2% YTD
2. Dow (which we signaled SHORT on Thursday in #RealTimeAlerts) +0.5% last week, but -1.0% YTD
3. US Consumer Discretionary stocks (XLY) down another -0.1% last wk to -3.3% YTD

This all makes sense to us as our Top Q1 Global Macro Theme was #InflationAccelerating, which:

1. Slows real consumption growth (short consumer stocks)
2. Pays those who are long of inflation, in inflation terms

How does one own 2011 style stagflation?

1. Utilities (XLU) up another +1.1% last week to +9.2% YTD
2. REITS (MSCI Index) up another +1.3% last week to +9.5% YTD
3. Gold up +0.7% last week to +8.3% YTD

That boring #GrowthSlowing setup sure beats being long Yelp (-32% since it’s 1^st wk of March social media-bubble high)! See our new Internet Analyst, Hesham Shabaan’s, bearish note on YELP from last week. The growth expectations embedded in that stock are scary.

Away from being long #YieldChasing, you can also be long things like inflation via:

1. CRB Commodities Index +0.6% on Friday vs Nasdaq -2.6% (CRB Index = +8.8% YTD)
2. CRB Foodstuffs Index up another +0.6% last week to +19.8% YTD
3. Coffee up another +2.4% last week to +63.8% YTD

I know, I know. Some of the smartest hedge funds on the planet are not long Coffee – they are long Twitter (TWTR) and Facebook (FB)! Why would you buy something like Pigs (+20.4% YTD), Soybeans (+15.4% YTD), or what Vanderbilt loved to get long of in his early days (Cotton +9.5% YTD)?

Smart in this game is as smart does. That’s capitalism. And so is reminding people of the score. This time won’t be different. Market history says that if A) Inflation Accelerates and B) Growth Slows, equity markets see multiple compression.

Two points of multiple compression on the SP500 (to 14x an earnings number that is too high) gets you 1638. Consensus is still looking for what it should have been looking for at this time last year (multiple expansion as inflation fell and growth accelerated). SP500 consensus for 2014 is still 1928.

Growth, as an investment style factor, looks like this for the last month:

1. Top 25% Sales Growth (top quartile in the SP500) is -2.8%
2. Top 25% EPS Growth is -2.6%
3. High Beta -1.2%

So, is this the beginning of the end for growth stocks, or is it the end of the correction?

Consensus (measured by the net long or short position in futures and options contracts) seems to think the latter. SP500 Index and E-mini moved to a NET LONG position of +38,651 contracts into Friday’s close. That’s the longest the the Street has been of beta since late December.

In other words, right as the front-month of US Equity Fear (VIX) made another higher-low last week, consensus hedge funds covered high and got longer. In our playbook that’s no coincidence. The destiny of bubble prices confirming lower-highs on accelerating down-day volume isn’t either.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.66-2.81%

SPX 1

Nasdaq 4090-4203

USD 79.96-80.66

Gold 1

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer