Newsflash, It's Q3

This note was originally published at 8am on July 31, 2014 for Hedgeye subscribers.

“For a fee, the exchange will flash information.”

-Michael Lewis

That’s a simple quote (from Flash Boys, pg 44) to a simple problem that RBC’s Brad Katsuyama faced in 2009 – being run over by getting late information. This is why Raj @Galleon paid such a premium for inside information. Front-running information flow? Yep. There’s big money in that.

There’s also lots of moneys in not losing other people’s moneys by chasing macro headlines that are taken out of context. Yesterday’s newsy Q2 2014 US GDP report was a fantastic example of that: “US Equity Futures and Bond Yields Surge on +4% GDP!”

Newsflash: it’s Q3.

Newsflash, It's Q3 - GDP cartoon 07.30.2014

Back to the Global Macro Grind

To be fair to the 2014 US Growth Bulls who are looking for +3-4% GDP and a 10yr Yield > 3%, with a Q2 +4% bounce off of one of the worst Q1s since World War II (see our Chart of The Day for context), on an annualized basis, 1st half of the year GDP in the US wasn’t negative. It was +0.87%. #Booyah

“So”, 62 months into a US economic expansion, as the intermediate-term TREND in US economic growth slows, you want to be buying that flash of Q2 “bounce” information, right? Wrong. US Equity futures reversed in a hurry yesterday and are now indicated down another 13 handles.

Spooo-hoo. What else can US consumer (XLY, XLP), housing (ITB), or early cycle industrial (XLI) perma bulls blame this morning?

  1. Europe? Sure, most of it, actually – Italian youth unemployment = 43.7% (whatever it takes!)
  2. China? After one of its best 2-week stock market moves in 4 years, not so much
  3. How about Israel or Putin, or something like that? #BlameCanada

I can flash you bullish information. Manufacturing that is easy. Twitter actually made-up user information using robots! It’s funny - if we write anything remotely USA bullish an entire community seems to cling to that like we’re going to enter the next 62 month expansion without ever leaving the first one!

According to one reading that I would characterize as one of the best contra-indicators of late 2007 (the Conference Board’s qualitative consideration of US consumer confidence), everything is just peachy. Problem is that you sell a cyclical (the US economy) when goldilocks is feeling peachy.

The best 2015 bull case (sorry, it’s still 2014) for the average American consumer that I have read to-date is one that our own Darius Dale wrote about yesterday (ping sales@Hedgeye.com for his note) – reversing the bearish #InflationAccelerating call we have had since January.

That thesis goes as follows:

  1. US Dollar rips again (after it already ripped to overbought YTD highs)
  2. Commodities collapse (like they did in 2013)
  3. And the US consumer starts spending his and her brains out

If only 80% of America got DD’s flash report from us in their gmail boxes this morning… The poor bastard making $48,000/year with peak all-time cost of living would wake up feeling rich again!

Obviously real world wages and consumption patterns don’t work that way (or did you get a rent reduction and discount at Chipotle this morning?). Markets aren’t economies either. If they were, the Argentine stock market wouldn’t have been +7% to +67.3% YTD yesterday.

Markets are non-linear and constantly being barraged by multiple risk factors, across multiple durations. Meanwhile investors are constantly being tested by their confirmation biases and emotions. That’s why, as I get older and fatter, I like to wait and watch.

I also like to ask myself a lot of questions. I genuinely enjoy reading my analysts research views too. If they are doing their job, they’re constantly in flux, weighing each data point within the context of both the last and our forward looking TREND.

Is the US Dollar “strong” (US Dollar Index is +0.4% over the last 6 months, -0.5% over the last year) because the US economy is strengthening, sequentially (from Q2 to Q3) or is the Euro (vs USD) simply weak because the European recovery is weakening?

If Europe’s recovery slows in 2H 2014 like the USA’s did in 1H 2014, what does that mean for US listed multi-national consumer staples and industrial stocks? Fortunately the answers to these questions won’t be in a “survey.” They’ll be marked-to-market, flashing as new time/price information on our screens.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.44-2.56%

SPX 1960-1978

RUT 1134-1154

DAX 9508-9753

VIX 12.21-14.41

USD 81.61-81.57

EUR/USD 1.33-1.35

Gold 1291-1323

Copper 3.17-3.27

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Newsflash, It's Q3 - Chart of the Day