This note was originally published at 8am on July 29, 2014 for Hedgeye subscribers.
“You see, I’m the event. I am the news.”
That’s a beauty quote from a book that finally made it to the top of my reading pile this summer – Flash Boys, by Michael Lewis. Brad Katsuyama and I have a few things in common. Well, sort of. We’re both Canadian – but I’m more of a High-Frequency-Tweeter than a trader.
The context of Brad realizing that his Old Wall order-flow from the Royal Bank of Canada was “news” to the machines front-running his (lack of) technology may have been enlightening to him at the time, but so were late 17th century concepts like the sun rising in the East.
The better one-liner came before the aforementioned one when Katsuyama’s IT guys reminded him that “you aren’t the only one trying to do what you’re trying to do” (pg 33). Everyone and their brother who is trying to short spoos (SPY), at the same time, should always remember that.
Back to the Global Macro Grind …
On the “news” at 10AM yesterday that US Pending Home Sales “missed” (again), the Housing stocks (ITB) dropped to -1.6% on the day, and Consensus Macro hedgies started shorting SPY, feverishly. If you want to beat your competition in this game, don’t do that.
The time to short Housing (ITB) and the Russell 2000 (IWM) was last week (Tue-Wed) when:
- Existing Home Sales were hoped to be a new bullish TREND
- The Russell bounced to lower-highs of 1158, and the SP500 hit an all-time high of 1987
- Facebook (FB) beat big and every social media’s profitless cow was going to jump over the moon
Hope, obviously, is not a risk management process. And, despite my addiction to tweeting, Twitter is not Facebook. We call selling/shorting on green and buying/covering on red Fading Beta because that’s what it is – fading the machines. You see, consensus capitulating on both the upside and downside is the event. In an oversupplied industry of short-term performance chasers, it is the news.
Don’t get me wrong, for longer-term investors, recent US #HousingSlowdown (see our Q2 Macro Theme Deck for details on why) data is downright frightening. To put some meat on that bone, today’s Chart of The Day shows what our Housing team calls the Hedgeye Housing Compendium – it rolls Hedgeye-style, in rate of change terms. And it’s color coded (red/green) so that even a Mucker can understand it.
USA’s Pending Home Sales are now trending down -7.2% year-over-year (versus growing at +12% year-over-year when we were bullish on US Housing last year). At the same time, the mother of all behavioral factors (last price) in US Housing has seen US Home Price Inflation (HPI) slow from its CoreLogic data peak of +11.8% last year to a preliminary estimate for June of +7.7%.
Now, if you think in absolutes (instead of rate of change), you might say that Housing is still “good.” Even if I gave you that, in my risk management model going from great to good is bad – and the stocks agree.
It’s not just the Housing stocks that aren’t horning people up YTD – it’s a lot of things US domestic consumer:
- Housing Stocks (ITB) -1.3% yesterday to -8.0% YTD
- Russell 2000 (IWM) down another -0.6% yesterday to -2.1% YTD
- US Consumer Discretionary stocks (XLY) +0.19% yesterday to +0.18% YTD
So why would you be long any of that stuff when you could be long the following:
- Utilities (XLU) up another +1.3% yesterday to +13.3% YTD
- Energy (XLE) -0.2% yesterday to +12.5% YTD
- Healthcare (XLV) +0.1% yesterday to +11.6% YTD
Those are the Top 3 performing sectors in the SP500 and they are clean cut ways to be long of either A) #InflationAccelerating and/or B) the slow-growth #YieldChasing born out of it. One of our favorite ways to be long Healthcare inflation is being long the hospitals (HCA).
If you’re not into the US stock market naval gazing thing and want to diversify, across asset classes, you could also be long things like:
- Commodities – Nickel and Coffee were up another +0.2-1.1% yesterday to +39.4% and +63.6% YTD, respectively
- Emerging Market Equities – MSCI EM and LATAM indices are +8% and +11% YTD, respectively
- Long-term Treasury Bonds – our in-house fav (alongside TIP), the TLT is +13.4% YTD
Remember, “you aren’t the only one trying to do what you’re trying to do.” So try to stop guessing what the spoos or Dow are going to do next, and line up your investable Macro Themes with the asset allocations that will help you front-run your performance chasing competition.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.45-2.54%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer