This note was originally published at 8am on August 26, 2014 for Hedgeye subscribers.
“Party like it’s 1999!”
With Total US Equity Market Volume down -35% versus its 2014 average yesterday, breadth weak (only 59% of stocks were up on the day), I kind of felt bad. As my fishing buddies know, I like to party – but that was a pretty underwhelming “SPX 2000!” party.
“Cause they say two thousand zero zero…
Party over, oops out of time
So tonight I’m gonna party like it’s 1999”
In other news, Amazon is buying Twitch for $970M in cash this morning and Morgan Stanley is going to take Hubspot (HUBS) public. US initial public offerings (in both number of issues and dollars raised) for 2014 are now at their highest level since the internet bubble (1999). No worries.
Back to the Global Macro Grind…
I’ve had an interesting career in that I’ve had the opportunity to be held accountable to risk managing two epic US stock market bubbles (1999 and 2007). Newsflash: as you are hitting the highs, almost everything looks like a long and your shorts suck.
Then, one by one, this thing called the cycle comes along and starts to take down some of the early cycle stocks. While I am sure being long Go Bro (GPRO), FireEye (FEYE), or Biotech (IBB) was fun yesterday, the Transports (IYT), Semis (SMH) and Housing (ITB) stocks were actually down.
Unlike high-short-interest momentum stocks that were up on the latest central plan to ban European economic gravity, some of these early cycle sectors were down on reality:
- US Markit PMI reading for AUG slowed to 58.5 (vs. 60.6 in JUL)
- US New Home Sales for JUL slowed -2.4% m/m (slowing for the 2nd straight month)
To be fair, despite falling interest rates, not as many Americans are either able or in the mood to lever themselves up on a new home these days. With cost of living running right around the all-time highs, many of your median income earning neighbors are broke too.
Rather than rant qualitatively about how bad housing demand is, today I have attached the Hedgeye Housing Compendium as the Chart of The Day. Since we look at everything in rate of change terms, the color coding of red means bad.
But, Keith, dude, look at the no-volume-squeeze in spoos – how bad is bad?
(*refer to how bad the US economy was getting in Q3 of 2007 when the SP500 didn’t stop going up until October for details)
Oil, Corn, and Wheat are straight down now, but for those of you still paying all-time-highs in US Rents (34% of Americans rent and rent represents 29% of the median consumer’s cost of living), and drinking coffee or eating meat, please ignore the following commodity update:
- Coffee prices up another +0.6% yesterday to +65.1% YTD
- Cattle prices up another +0.4% yesterday to +13.3% YTD
- Wheat prices down another -1.7% yesterday to -10.4% YTD
Yep, if you want to be bullish on the US Consumer (after 62 months of US economic expansion) as Boris (Woody Allen) said in Love and Death, “wheat – all there is in life is wheat” (VIDEO https://www.youtube.com/watch?v=Tt2JVOrAZGU).
If you’re not into cream of wheat, both the CRB Food Index and the Long Bond (TLT) are +16% YTD, btw. That certainly crushes being long early cycle growth style factors in US Equities like Housing and the Russell 2000 (IWM).
Oh, and then there’s what got this party started yesterday in US Equity Futures – moarrr central planning from the Europeans. How’s that follow through, worldwide, looking this morning?
- Most of Asian Equity markets were down overnight (China -1%, Japan -0.6%, Indonesia -0.6%, India -0.4%)
- All of the European major equity indices are failing @Hedgeye TREND resistance
- The consensus hedge (SPX Index and Emini futures and options contracts) isn’t up
Even if the SPX was up, I wouldn’t entirely disagree with the why. Don’t forget that the SP500 looks as slow-growth-yield-chasing as it ever has, and while I much prefer being long the Long Bond (TLT) than SPY in 2014, I’m more focused on shorting early cycle small-mid-cap stocks.
If your boss is forcing you to buy something at the all-time highs in SPY, I’d opt for being long big to mega cap liquidity. Why? That’s easy. When this bubble starts to blow (up), you want to be able to get out.
From my analysts, here’s a Top 3 list of big caps that both they and my risk management signals still like:
- Capital One (COF) – Josh Steiner
- HCA Holdings (HCA) – Tom Tobin
- Texas Instruments (TXN) – Craig Berger
If you want to lever yourself up long on early cycle small-mid caps and/or European equities here, have at it! It’s a party. “Say it one more time – two thousand zero zero …” and it’s time to party like we are running out of time.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.34-2.44%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer