This note was originally published at 8am on August 11, 2014 for Hedgeye subscribers.
“The unwinding began at countless times, in countless ways.”
Yep. After a wonderful weekend with my family on the East Coast, I figured I’d get up early this morning and cheer you up with that quote. It comes from George Packer’s recent bestseller – The Unwinding: An Inner History of The New America.
Under both the Bush and Obama central-econ-planning regimes, what’s really been unwinding for the last decade is the bull case for sustainable and real (i.e. inflation adjusted) US GDP growth. But both you and the bond market probably already know that.
Who seems to miss this roughly all-of-the-time are America’s Old Wall “economists.” In a Wall Street Journal poll on Friday, 43 economists agreed to agree that US GDP growth will magically be 3% in the back half of 2014. In today’s USA, that looks almost impossible.
Back to the Global Macro Grind…
In stark contrast to what I loved about the ole-school 1980s/1990s USA breakouts in both #StrongDollar and #RatesRising in 2013, today we have a Dollar that has done, well, absolutely nothing year-over-year, and interest rates crashing.
Crashing? Yep. The 10yr US Treasury Yield crashed (again) last week, falling -20.2% from where it started the year (at 3.03%). At 2.43% this morning, the 10yr couldn’t care less about the emotional roller coaster that is 80% of hedge funds trading the spoos.
Spoos (pronounced, spoo-z – or boo-hoo-zzz) are making grown men cry in 2014 as the net long or short position that the herd takes in these emotionally abused securities manifests into one of the best weekly contrarian market indicators in my notebook.
Check out this directional indicator for the last 3 weeks (SPX Index + Emini net LONG or SHORT position in CFTC non-commercial contract terms):
- AUG 11th (today) = net LONG +10,716 contracts
- AUG 4th = net SHORT -41,210 contracts
- JUL 28th = net LONG +614 contracts
Short low, cover high? The context of these weekly moves is critical. Don’t forget that the all-time-bubble-high for the SP500 was established on July 23-24 at 1987. As of Friday’s no-volume rally (Total US Equity Volume -18% vs. its 3-mth avg), there have only been 2 up days in the last 12 trading days.
While buying “dips” in anything early-cycle growth slowing has been painful in August, being long #GrowthSlowing via TLT (Long-Bond) +13.8% YTD vs Russell 2000 (US Equity Growth bogey) -2.8% YTD has been nothing short of fantastic. So let’s keep doing more of that.
From a risk management (and relative performance) perspective, what you don’t do in this game is often more important than what you are doing. You don’t have to buy early-cycle stocks that are slowing just because they look “cheap.” You need to avoid that temptation before “cheap” gets cheaper.
If we’re right on #Q3Slowing, two major places to avoid on “valuation” are:
- US listed Industrials (which are really multi-nationals) = XLI
- European Equities = EZU, EWG, EWI, etc.
Last week in Europe was ugly:
- Greece led losers at -9.9% on the week (and is “bouncing” +2% this morning #hooray)
- Portugal was down another -6.7% to -17.5% YTD
- Germany was down another -2.2% to -5.7% YTD
No, Germany is not Greece. But my aunt’s sister is my Mom. And #interconnectedness matters.
Not only do my intermediate-term TREND signals continue to signal bearish for European Equities, but our proprietary GIP (Growth, Inflation, Policy) model is probability weighing the same for the next 1-3 quarters of European growth. #Q3Slowing
That’s probably why a lot of single stock setups are bearish TREND too (DEO, KO, GE, etc.). If your two main markets are USA and Europe, you want to be paying attention to this bullish-to-bearish TREND reversal @Hedgeye very closely. We haven’t had a coordinated unwinding of growth expectations since 2011.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.40-2.50%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer