Numb Is The New Deep

“Numb is the new deep, done with the old me, and talk is the same cheap.”

-John Mayer

 

From George Carlin to John Mayer, we’re finding ourselves some new ideas this week. I am industry agnostic. I am looking for professional thought leaders who are right  - not those crusty “strategy” dudes on the sell side who get paid to report yesterday’s weather.

 

Mayer likes to make calls on the weather. From his song, The Remedy, Mayer will remind you that  “you can turn off the sun, but I'm still gonna shine.” He grew up close enough to Wall Street people (in Fairfield, CT) to understand this gong show, and he seems to be striking a strategic chord with where all the US market group thinkers are at right here and now. The metaphor is dead on - this market is numb.

 

To mix a little Research Edge with some PIMCO and Mayer, Numb is The New Reality, the “New Normal”, and the “New Deep”. Top to bottom (on a closing basis) the SP500 has traded in a 5 point (1025-1030) range this week. This is also The Grind.

 

Yesterday I explained that The Grind perpetuates the inertia of a Ball Underwater. Once we get through month end for August (Monday), I’m looking for a big move. That Ball Underwater is going to move to the bull or bear side, big time.  The US Dollar is going to decide the direction.

 

Unlike some, I don’t wake up looking to be bullish or bearish. Some market psychologists have labeled that “confirmation bias”, and I think they are spot on with that. In a global market place whose factors are as increasingly interconnected as this one’s continue to become, you have to be thesis agnostic. As the facts change, you should.

 

As I look across the global macro factors in my notebook this morning, more of them are color coded green.

 

Green is good. Red is bad. The market is numb.

 

 

What’s flashing green?

 

1.       The US Dollar failed to breakout through the immediate term TRADE line yesterday ($78.58); it backed off hard, and REFLATION took off

 

2.       Daily Risk/Reward for the SP500 this morning moves from negative to neutral (1012 support versus 1049 resistance)

 

3.       The SP500 made a higher-YTD-high yesterday at 1030 on accelerating daily volume (day over day volume was +14%)

 

4.       The VIX (US Volatility) continues to trade below the immediate term TRADE line of 25.09

 

5.       All 9 SP500 sectors in Howard Penney’s Sector Views continue to flash positive TRADE and TREND

 

6.       Asian markets, away from the Chinese local A-shares, continue on their bullish path making higher-lows on all selloffs

 

7.       Western European equity markets are up 1-1.5% across the board, led by Germany, trading up +1.4% at +15.4% YTD

 

8.       Eastern European equity markets are up double the West Side, being led by Poland, trading up +2.8% after posting POSITIVE +1.1% y/y GDP for Q2

 

9.       3-month LIBOR (the rate over which the world lends) is hitting another YTD low at 0.36%! (yes, that’s a ZERO)

 

 

What’s flashing red?

 

1.       The immediate term range of the SP500 continues to expand; now at 74 points wide versus last Friday when it was 40 points

 

2.       The US market’s breadth continues to deteriorate as we hit new YTD index highs (advance/decline line yesterday was +54% to -44%)

 

3.       China closed down -2.9% on the Shanghai Composite last night, breaking down through my intermediate term TREND line of 2,959

 

4.       Japanese unemployment spiked +30bps m/m to +5.7% from +5.4% in June

 

5.       Oil and copper prices are testing YTD highs again this morning; this assures us that we will see Reflation Rotation (into y/y inflation in Q4)

 

6.       UK Consumer confidence for August didn’t budge; at -25, the report is in-line with last month’s

 

 

What’s making this market numb?

 

1.       Money

 

A)     The US Federal Reserve’s Balance Sheet expanded for the 3rd consecutive week to $2.07T (that’s TRILLION)

 

B)      On a year-over-year basis, the Fed’s Balance Sheet has expanded by $1.2T (that’s TRILLION)

 

C)      M2 (money supply) growth is now running +8.5% annualized

 

Money, money, money… as John Mayer wrote: “Never, ever underestimate the power of I’d like that.”

 

Whether it’s a $16B US Madoff fraud or a $2.07T Balance Sheet, a “B” of this and a “T” of that ain’t what it used to be. Neither is a US Dollar. After the most expedited short squeeze in modern US market history (+52.4%!), this market is numb to it all at this point…

 

Was it Ben Bernanke or Alan Greenspan who said that the “MAX” that US Money Supply should grow is +5% year-over-year? Was it Ben or Alan who called this a Great Depression first? Was it some dude in Poland or the Philippines who just put up his hand in the last 48 hours calling out that their respective countries are still running positive GDP growth in that said Depression?  Who cares when we’re numb right…

 

“Numb is the New Deep” and Wall Street to Washington market strategy “talk is the same cheap.”

 

Have a great weekend with your families,

KM

 

 LONG ETFS

  • EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.

 

  • EWZ – iShares BrazilPresident Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

 

  • QQQQ – PowerShares NASDAQ 100We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

 

  • CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

 

  • TIP– iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

 

  • GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold.  We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.

 

SHORT ETFS

 

  • LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

 

  • XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.

 

  • DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21.

 

  • EWJ – iShares Japan –We’re short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

 

  • SHY – iShares 1-3 Year Treasury Bonds – If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more