This note was originally published at 8am on September 03, 2014 for Hedgeye subscribers.
“Reconciliation, n. A suspension of hostilities. An armed truce for the purpose of digging up the dead.”
In what will undoubtedly be my worst two macro market days to start a month since the first week of July, I am the man in the arena this morning whose face is marred with blood and mud.
Back to the Global Macro Grind…
I can’t for the life of me find the sell-side note that explained 6-9 months ago that the bull case for both European and US growth equities was that Draghi was going to save Europe from slowing and that Putin was going to declare a truce. #ThesisDrift
But macro markets drift, and whether you like its message or not, the score is the score – and I’ll be held accountable to it. Responsibility in recommendation starts with answering questions in the moment. What do we do next?
I’ll summarize the questions I’ve been getting from Institutional Investors and give you where I stand this morning:
Q: Do you think the UST 10yr Yield has bottomed?
A: No. While yesterday’s ISM print was impressive, it’s not the consumption economy – I think it partly reflects the late-cycle pricing and hope you’ll see at the end of most economic expansions. Risk to Q3 GDP consensus estimates remains to the downside. 10yr yield has immediate-term downside to 2.33% and this makes Friday’s jobs report all the more important now.
Q: Do you cover the Russell 2000 short?
A: No. Much like when bond yields had a head fake (to the upside) in early July and the Russell rallied, IWM has been doing the same for the last few weeks on even less volume. To put yesterday’s move to 1179 in context, Total US Equity Market Volume was -32% vs. its YTD avg, and the Russell would still need to rally +3% (from here) to get back to the July 7th breakeven.
Q: Doesn’t the price of Oil falling get you more bullish on the US Consumer?
A: No. I never was bullish on the median consumer or US housing to begin with! If Brent breaks $95, it might get me less bearish, but not flat out bullish. While the rate of change always matters (WTI crude was -3.2% yesterday as Putin leaked the truce to his boys), the overall consumption tax on US consumers is broad based (Rents at all-time highs, Food prices +16% YTD, Real Wages flat to negative, etc.).
Q: Don’t you think the US stock market looks good on up days?
A: Kidding. No one actually asked it that way. But if you are me and see the reams of questions I get in the heat of the moment (how “bearish” the market looked at the early AUG lows when the Russell 2000 was at 1114 and SPX = 1925), and how this market looks like its “gonna rip”, “never really go down”, etc. after 5 straight up weeks… you’d at least chuckle.
Q: Doesn’t Draghi have credibility with markets?
A: Yes. We don’t doubt this guy means what he says and we don’t disrespect his impact on the currency market either (that’s why I covered the US Dollar short idea on the only pullback we’ve had since he decided to devalue again at Jackson Hole). But don’t confuse market credibility with economic stability. QE is simply a centrally planned policy to inflate asset prices.
Q: Do you buy European Equities on the Draghi put?
A: Not sure. I still need to see how markets respond to what he has to say on Thursday (ECB meeting). Buying European Equities today is a very different thesis than our bullish on European #GrowthAccelerating call was from 2013 until Q2 of 2014. Effectively, you’d be buying into a slowing economy with a broken idea that a renewed Policy To Inflate will “stimulate” real economic growth.
Q: Do you stay with long China and India?
A: Yes. Both the absolute and relative returns of these two stock markets (China +11.5% and India +30.1% YTD) are pulverizing something like the Russell 2000. More importantly, we think that’s happening for the right rate-of-change economic reasoning. In stark contrast to US and European GDP growth (which is slowing both sequentially and y/y), India is flat out accelerating, and China is finally stabilizing.
Q: What’s your sense on sentiment?
A: In the US stock market, I can assure you that many funds have been forced to chase this 4-5 week move off the August lows. In the US bond market, people are still fighting the down rates move too. Looking at the II Bull/Bear US Equity Sentiment Survey this morning, Bears have been blasted to fresh YTD lows of 13.3%, and the Bullish Spread is testing its early July highs of +4,280 (basis pts) wide to the bullish camp.
In other words, there will be no bear truce issued from Stamford, CT today. If you’d like to answer all of these questions differently, I’d be happy to post them to our entire subscriber base. It’s what makes a market.
When my face is bloodied, I love to get right back up, take a stance, and fight.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.33-2.46%
Brent Oil 100.74-103.71
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer