This note was originally published at 8am on April 21, 2014 for Hedgeye subscribers.
“Small, nimble, fast changing.”
That’s how Julia Lovell described early 19th century England (relative to China) in The Opium War. “While China’s slavish people had been homogenized into speaking one language … and sympathizing in the same manners.” (pg 79)
As a company or a country, you do not want to become 17-19th century China. You don’t want to be what Europe morphed into during the 20th century either. As a Canadian capitalist who came to this country in the 1990s, I often wonder what America’s 21st century will look like. It’s not what it used to be.
Sadly, the path of least resistance is one of a slower-growth bureaucracy. That’s not my opinion. That’s the history of countries who age. So don’t do that. Do what you can to put two-feet on the floor every morning and earn your keep; fight the tyranny of government groupthink; be nimble and changing.
Back to the Global Macro Grind…
If only because I finally took a vacation, watching the US equity market melt-up to lower-highs on no volume was interesting to watch, intermittently. But one week does not an intermediate-term TREND make. As a friendly reminder, it’s late April and most major US stock market indices are down year-to-date.
Inclusive of the Dow (which we are short in Real-Time Alerts via the DIA) and US Consumer Discretionary stocks (XLY) rising +2.4-2.5% last week, they are both still -1.0% and -4.6% for 2014. If you are long America thinking this is the 1990s #StrongDollar growth cycle again, that is not good.
Two of our most outside of consensus Global Macro Themes are:
- US #InflationAccelerating
- US #ConsumerSlowing
Both have continued to play out in April. While they are bearish from a cyclical and secular US consumption growth perspective (see our Q2 Global Macro Themes deck for details), there are obvious ways to play this from the LONG side:
- Long Inflation, explicitly, via Commodities (DBA, UNG, CAFE, etc.)
- Long Inflation, protection, via Treasury Inflation (stagflation) Protection (TIPs)
- Long #GrowthSlowing via Bonds (TLT) and any slow-growth Equity (XLU) that looks like a bond
Those speaking the Fed’s language (“there is no inflation”) and/or #OldWall consensus (“Wall Street Bond Dealers Whipsawed on Bearish Treasury Bets” –Bloomberg this morning) don’t get this, yet. But markets do.
Speaking of YTD market scores, how about those commodity markets!
- CRB Food Index up another +2.7% last week to +21.6% YTD
- Coffee and Soybean prices up again last week to +77% and +19% YTD, respectively
- Natural Gas +2.6% last week to +15.8% YTD
I know, I know. As long as you don’t eat and/or plan on running the air conditioning in your house this summer, those food and utility bills (according to those speaking one language in Washington) are “non-core” to what you really need to be spending on – a $600-700 iPhone 6 upgrade!
While I was in the pool with my kids Thursday, our long Natural Gas (UNG) and Coffee (CAFE) buy-signals in Real-Time Alerts ripped. But don’t tell the Fed that. They’re still saying what US consumers had to pay (front-month) to heat their homes this winter was “transient.”
Sure, almost every “fundamental” analyst in the Federal League can tell you that there is an “over-supply of Natural Gas” in America. But most of them won’t tell you there is an over-supply of people who were long the Dow and social media stocks on January 1st.
The YTD score doesn’t lie though; those saying there is no inflation do.
Into the belly of US “earnings season” (and away from the aforementioned asset allocations to commodities and bonds), how does all of this look from a Hedgeye Style Factoring perspective (in US Equities) in the last month?
- Top 25% Sales Growth Companies (Top Quartile of SP500 Companies) are -2.2% (vs. the bottom 25% being +2.2%)
- Top 25% EPS Growth Companies are -1.3% versus the bottom quartile being +2.6%
- High Beta Equities are -0.2% versus Low Beta +1.8%
Since it’s also NHL Playoff season, as Herb Brooks said in Miracle, “Again!”
Again, and again, and again… for centuries, big, fat, centrally planned countries who have devalued the purchasing power of their people in exchange for political safety have lost this war. It ends with inflation. And inflation slows both growth, and the multiples markets pay for them.
Our immediate-term Global Macro Risk Ranges are now:
Brent Oil 108.21-110.62
Natural Gas 4.46-4.78
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer