Crossing The Bubble

This note was originally published at 8am on September 09, 2014 for Hedgeye subscribers.

“First there is a mountain – then there is no mountain. Then there is.”

-Zen Proverb

 

Replace the word #bubble for mountain and you’ll be right where I think the US stock market is right about now. While April-May of 2014 (when social-cloud-bubble stocks were imploding) may seem so 4-5 months ago, if you want to review the risks, there they were.

 

The aforementioned quote comes from the beginning of chapter 2 in a Tech #bubble book I’ve been re-reading for the last week, Crossing The Chasm, by Geoffrey Moore. The chapter is called High Tech Marketing Enlightenment.

 

Originally written in 1991 and re-published in 1999, it was one of the first books that the Quatrone boys in the bubble department at CS First Boston told me that I had to read. So I did. And within 6 months, the entire thing went poof…

Crossing The Bubble - Hindenburg

 

Back to the Global Macro Grind

 

What we called the internet back then is now called the “cloud.” And my former employer (CS First Boston) is now called Credit Suisse. Their new head of investment banking ran the Alibaba #bubble road-show at the Waldorf yesterday. If you were there, congratulations – you were crossing the 3rd US stock market bubble I have seen in my career.

 

#Bubble?

 

On our research desk yesterday I was using the term freely. Not having any conflicts of interest (banking, brokerage, advertising, etc. fees), it was kind of fun – you know, being honest and stuff…

 

“But Keith, Alibaba is a big company that makes money.”

 

At 27-30x revenues, imagine they didn’t? (Amazon came public at 10x revs in 1997)

 

BREAKING: Facebook’s Value Tops $200B –Bloomberg

 

Oh and today Apple (AAPL) is going to host an Obama-like rock star concert (U2, who I love, will be there!) today at the Flint Center (where Steve Jobs introduced the Macintosh in 1984) with larger screens, wearables, and stuff… #cool.

 

That stock is “cheap” though. Its market cap is only $600B. That’s with a B, as in bubble or beelion dollars, bros.

 

Since we’re throwing around billions in one hundred dollar clips right now, why shouldn’t Alibaba be worth $200B? Exxon (XOM) is only worth $400B (and they make money too!).

 

*PS. If you think I am nuts. Please re-read this 1 year from today.

 

In yesterday’s Early Look, for some reason this sentence got a lot of attention/feedback: “I haven’t been this bearish since the fall of 2007.” So I’ll reiterate that this morning with one caveat – I haven’t been this bearish on US stocks since yesterday.

 

In other news, the #bubble formerly known as Bitcoin dropped to $469 today.

 

And everyone and their brother seems to think that bonds are finally going to prove them right (going down). So I’ll reiterate the bullish on US #Q3Slowing call (bullish on the Long Bond, in TLT, EDV, and BND terms) too this morning.

 

Since no one on consensus TV will be watching anything but AAPL today, here are some Bond Market levels to monitor:

 

  1. Immediate-term TRADE risk range of the 10yr UST Yield has widened to 2.31%-2.51% (widening ranges are bearish)
  2. Intermediate-term TREND resistance line for the 10yr Yield = 2.81%
  3. Immediate-term TRADE risk range for the 30yr UST Yield has widened to 3.03-3.29%
  4. Intermediate-term TREND resistance for the 30yr Yield = 3.46%

 

That’s why I am taking our allocation to Fixed Income (Hedgeye Asset Allocation Model) to 91% of its max this morning. My “max” allocation to any asset class is one-third of total assets.

 

If I was running my hedge fund, what the 0% US Equity allocation implies is a net neutral (fully hedged on a beta-adjusted basis) book. And my net long position to International Equities would be 16% (and rising) on pullbacks to the low-end of my risk range.

 

If you’re at CS telling people it’s different this time – best of luck. Crossing the bubble is a big business, so make sure to get either a big allocation or commission! Forget 2007, the drawdown risk in billions of #bubble market cap terms is more epic than it was in 2000.

 

My immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.31-2.51%

SPX 1982-2007

RUT 1154-1179

VIX 11.34-13.56

EUR/USD 1.28-1.30

Pound 1.61-1.64

Gold 1251-1286

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

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