This note was originally published at 8am on May 02, 2014 for Hedgeye subscribers.
“He is illiterate and boorish; austere and offensive.”
-The Mercantile Agency, May 1853
In some of Americas most formative years of free market capitalism and innovation, the authorities of perceived wisdom wrote that about one of the greatest wealth creators in US history – Cornelius Vanderbilt.
“It is said that I am always in opposition, and that the same spirit of resistance which has often hitherto governed my action has influenced it now… I have only to say that this is the same spirit which founded this great Republic.” (The First Tycoon, pg 161)
And that’s all the man needed to say about that.
Back to the Global Macro Grind…
In this day and age, the more real-time market illiterate a politician is, the more offensive (to me at least) he becomes. Other than the brilliant financial market mind that is Maxine Waters, these characters are usually he’s by the way – we men think we know everything.
While I can’t comprehend how consensus economists are getting to a +3-4% US GDP ramp in the coming quarters, I guess I’ll just have to be all boorish for the next few months and reiterate how ridiculous the Old Wall’s linear forecasting process has become.
On a cheerier note, it’s jobs Friday! And while I am sure everyone wants to know what Steve Liesman has for his NFP guess, my boy, Mr. Bond Market, has already front-ran the entire circus:
- US 10yr Yield got smoked yesterday to 2.63%, taking it DOWN 40 basis points YTD! (consensus is still short Treasuries)
- US 10yr minus 2yr Yield (The Yield Spread, which is a growth proxy) compressed another 3bps day-over-day
- As our long bond position (TLT) ripped to fresh YTD highs, anything equities that looked like a bond did too
NEWSFLASH (to those waiting on the next qualitative “survey” from our competitors): Bonds rip when growth is slowing.
Anything that looks like a bond is called #YieldChasing (they’re ripping too):
- Utilities (XLU) up another +0.5% yesterday (with the SPX flat) to new YTD high of +14.3%!
- REITS (VNQ) punched another fresh YTD high too up at +13.5% YTD
As for the 80% of America that is going to eat both inflation and growth slowing:
- US Consumer Discretionary Stocks (XLY) are still down -4.1% YTD
- US Housing (ITB) is still sucking wind at -4.9% YTD
For the style-factor illiterate who gets on TV and says ‘but the market is up’ (even though both the Nasdaq and Russell are down YTD), in mathematical terms we call this risk developing underneath the US stock market’s hood SECTOR VARIANCE. In chaos theory speak, variance rises when major macro factors are undergoing the initial stage of what physics fans call a PHASE TRANSITION.
Phase transitions (like water approaching a waterfall) are really cool, because consensus doesn’t realize what’s happening a foot below the visible surface… Then kabooom! A proactively predictable point of entropy occurs. Variance, Phase Transition, Entropy – offensive terms for those who haven’t evolved their process = excellent defensive strategies for you to deploy.
If you want to consistently beat beta in this game, you have to know A) when to go on defense and B) how to rotate offensively from that defensive position. More commonly known as sector rotation, you get what I mean. Our process takes the sector rotation idea up another 10,000 feet because we go all cross-country-cross-asset-class on you.
At the beginning of Q2, on the long side here’s where we continued to rotate to (Investment Conclusions – slide 48 of our Q214 Global Macro Themes deck, which all of our Institutional Research customers can get an updated copy of anytime):
- Bonds (BND)
- Long-Term Treasuries (TLT)
- Gold (GLD)
- Agricultural Commodities (DBA)
- Utilities (XLU)
- REITS (VNQ)
- India (EPI)
- Brazil (EWZ)
No matter what this jobs report says today, we want you to keep doing more of this because A) it’s still nowhere in the area code of consensus and B) it’s working.
Instead of calling us bearish, bullish, or boorish, I say you call us flexible. This is the opposite position our process suggested you be in at this time last year. Having resistance versus a broken consensus isn’t easy. But being a capitalist in America today isn’t either.
Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with a TREND overlay are in our Daily Trading Range product):
UST 10yr Yield 2.59%-2.70%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer