“Did you think I’d lay down and die? Oh no, not I – I will survive.”
I’m thinking some of the bond bears need some love this morning, so I thought I’d bring you some of that with Gloria Gaynor’s 1978 Grammy Award Winning disco love track, I Will Survive!
“At first I was afraid… I was petrified.
Kept thinking I could never live without you by my side…
But then… I grew strong. And I learned how to get along”
‘Oh, as long as I know how to buy the Long Bond, I will get along… I know I will stay alive. And I’ll survive. I will survive! Hey, hey…’
Back to the Global Macro Grind…
Being born in the 1970s, I still get what living without all of the entitlements in the world means. Savings matter. So does saying thank you to the people who helped bring me along in my #blessed life.
One of the greatest gifts I’ve ever received was the time in which I entered this business. From my first trading internship at Williams Trading in the summer of 1998, to my first job @FirstBoston in 1999, I saw both the hedge fund business hockey stick and the Tech #Bubble manifest, then collapse.
For my 1st three years on the buy-side, the SP500 was down on the year (2000, 2001, 2002), so I learned how to A) not lose other people’s moneys first, then B) get really long when people hated stocks in 2003-2006. Oh, and then another #Bubble in 2007. Market crash. Epic recovery. Then this…
But what is this?
- #Quad4 – where both US growth and inflation (in rate of change terms) are slowing, at the same time
- #EuropeSlowing – and why Draghi’s central planning drugs will be hard pressed to arrest it
Oh, yes. #Bubbles.
How does your portfolio survive an early cycle global recession as asset prices are deflating and #Bubbles are popping?
- Raise Cash (mine is at 62% in my asset allocation model this morning)
- Be big on the long side of Long Term Treasuries (TLT, EDV, etc.)
- On pullbacks add to Munis, and maybe some Healthcare and Consumer Staples stocks
While this call may have sounded aggressive with the 10yr UST yield at 2.63% less than 3 weeks ago, it should have. While I don’t get paid like I used to (just putting the position on, in size), I still wake up at 4AM wanting to win, just like you do.
In Signal Terms (Real-Time Alerts), I issued 33 SELL signals (13 BUYS) in the month of September. Most of the sells were in US and European equities. Most of the buys were bonds. And I’d still buy more long-term bonds if there’s another opportunity!
When something big and contrarian like this is going your way, you don’t run for the exits during no-volume market head-fakes. You press it (or, as the great Stan Druckenmiller would say, “you spread your wings”).
That said, almost 100% of the questions I got in mid-September had to do with:
- Selling Bonds
- Buying Stocks
When the right questions should have been:
- How big do I make the Long Bond position on the recent pullback?
- How big do I get on the short side of the Russell 2000’s liquidity trap?
Markets don’t go from #bubble mode to buys on a -3.2% correction (that’s where we are for the SP500). However, on a -10.2% draw-down (Russell 2000’s drop from its all-time #Bubble high on July 7th 2014), levered long players start to freak out.
As they should.
What is the catalyst to reverse the Long Bond’s (TLT) total return of over +18% (vs Russell -7% YTD loss)? I don’t think there is one. If there is one catalyst we have been warning investors of all year long that matters most here, it’s the cycle.
That is it. The cycle, slowing.
And if one ISM slow-down print (yesterday’s was reported at 56.6 for SEP vs 59.0 for AUG) can smoke the 10yr Treasury Yield down to 2.39% in a day, what do you think the next bad jobs report and/or US GDP miss is going to do?
Personally, I don’t say buy FogDog.com or the FireEye on that. Stay with our Macro Playbooks, and you will survive this #bubble.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.36-2.53%
WTI Oil 89.01-92.14
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on September 18, 2014 for Hedgeye subscribers.
“The tools for managing paradox are still undeveloped.”
That’s the opening volley in the latest #behavioral book I have cracked open, The Rise of Superman, by Steven Kotler. It’s a book about flow, as in athletic flow – where world class athletes “completely redefine the limits of the possible.”
When it comes to central planning limits, there are none (yet). And that’s making your job as a Risk Manager all the more challenging. No matter what you think the Fed, ECB, and BOJ should do, you have to operate within the paradox of what they will do.
When you’re forced to operate within a paradox, life gets tougher. By definition, a paradox is a “statement that apparently contradicts itself and yet might be true” (Wikipedia). But what happens when the promised output of the policy within the paradox isn’t true?
Back to the Global Macro Grind…
The good news on the truth is that Janet Yellen actually rolled with it yesterday. When former WSJ reporter (now of The Economist fame) Greg Ip asked her why the Fed continues to cut its growth estimates, this is what Janet said:
“So, there’s been a little bit of downgrading… you are certainly right, there has been a pattern of forecasting errors.”
“So”, what we have within the Policy To Inflate America’s cost of living to all-time highs, is a pattern within the paradox. And it’s that very pattern (forecasting errors) that the entire edifice of consensus clings to like a free-climber to the mother of all centrally planned cliffs.
Oh, and to make matters worse, now every Mickey Mouse macro journo in America has figured out what the “dots” are…
That’s not good. Because the only thing worse than the buy-side trading on the Fed’s first “rate hike” expectations (which have been wrong all year), is the manic media agreeing that both the Fed and Wall Street consensus growth forecast is going to be accurate.
Forget this time – if all of consensus nails US GDP growth being +3% for the next 6 quarters, that would be different!
In other news:
- “Fed Keeps ‘Considerable Time’ Pledge As Growth Moderates” –Bloomberg
- Asset bubbles absolutely love incremental easing
- Ali-bubble (BABA) will be the biggest IPO in US history
Fortuitously, we aren’t yet brain-dead from trying to front-run the proactively predictable behavior of the Fed, and we got longer of asset price inflation on red (Monday and Tuesday, we moved to 12 LONGS, 4 SHORTS in Real-Time Alerts and cut our Cash position to 34% in the Hedgeye Asset Allocation Model).
But, on the damn dip, we didn’t buy into momentum bubbles or illiquid small cap US equity exposures. We went with:
- Moarrr #GrowthSlowing Bonds
- Stocks that look like Bonds (Utilities)
- International Growth Equity exposure (China, India, etc.)
Inclusive of the centrally planned pop, the Russell 2000 (small cap Style Factor) is still down -0.9% for 2014 YTD versus a proxy for the #GrowthSlowing Long Bond (TLT) which is +11.1% YTD.
No, long-term interest rates haven’t re-tested their YTD lows (they just hit those 3 weeks ago, so now you have the bounce in rates to lower-highs). And, no, the US Dollar hasn’t backed off its multi-standard deviation overbought highs (yet), but give these things time.
With time you get more data. And Janet made it very clear yesterday that she doesn’t want to be put in the dot-box; she wants to be “data dependent.”
Which, to me, means that if we are right and US GDP slows in Q3 and/or we have one more bad jobs report, market expectations will push those dots out (again). The Fed’s paradox is that the lofty growth expectations embedded in the dots just aren’t true.
Our immediate-term Global Macro Risk Ranges are now (we have 12 big macro ranges in our Daily Trading Range product, which includes our bullish/bearish intermediate-term TREND signals for each asset allocation):
UST 10yr Yield 2.39-2.62%
BSE Sensex 26588-27971
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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- Why investors should continue to decreasing their exposure to DM Equities
- What those who must remain invested in this asset class should rotate into
- The market dislocation in Hong Kong small-caps
Best of luck out there,
Associate: Macro Team
TODAY’S S&P 500 SET-UP – October 2, 2014
As we look at today's setup for the S&P 500, the range is 36 points or 0.98% downside to 1927 and 0.87% upside to 1963.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.90 from 1.87
- VIX closed at 16.71 1 day percent change of 2.45%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:30am: Challenger Job Cuts y/y, Sept. (prior -20.7%)
- 7:30am: RBC Consumer Outlook Index, Oct. (prior 52.4)
- 7:45am: ECB seen holding refinance rate at 0.5%
- 8:30am: Init Jobless Claims, Sept. 27, est. 297k (prior 293k)
- 8:30am: ECB’s Draghi holds news conference
- 9:45am: ISM New York, Sept. (prior 57.1)
- 9:45am: Bloomberg Consumer Comfort, Sept. 28 (prior 35.5)
- 10am: Factory Orders, Aug., est. -9.5% (prior 10.5%)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
- 12pm: Fed’s Dudley speaks in New York
- 1pm: Fed’s Lockhart speaks in Atlanta
- 8pm: Fed’s Bullard speaks in Tupelo, Miss.
- President Obama speaks on economy at Northwestern University
- Supreme Court may issue list of cases it plans to consider
- Senate, House out of session
- FHFA Director Mel Watt, housing experts, community leaders hold town-hall meeting at Detroit Public Library
- 11am: IMF Managing Director Christine Lagarde delivers remarks on “The Challenges Facing the Global Economy”
- U.S. ELECTION WRAP: No Democrat in Kan. Race; Debates in Alaska
WHAT TO WATCH:
- BofA CEO Brian Moynihan Named Chairman as Crisis Struggles Fade
- Draghi Buying Spree Seen Starting Modestly in ECB Program
- WTI Slips Below $90 for First Time in 17 Months on Supply
- Tesla’s Musk Says Company Will Introduce New Product Next Week
- Box Said to Delay IPO Until 2015 on Market Volatility
- Citigroup Ordered to Turn Over Banamex Files to Pension Fund
- Trump Entertainment Pegs Casino Survival on Icahn’s $100m
- Ebola Patient’s Flight Spanned 4 Airports on 3 Continents
- RealD Gets Takeover Offer From Yahoo! Activist Starboard Value
- Sands’ Adelson Predicts Macau High-Roller Rebound in 2 Months
- ‘Pirates’ Sequel to Film in Australia as Lower FX Cuts Cost
- Actuant (ATU) 8am, $0.52
- Constellation(STZ) 7:30am, $1.15
- Global Payments (GPN) Bef-mkt, $1.14
- McCormick (MKC) 6:30am, $0.81
- Resources Connection (RECN) 4pm, $0.14
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Slips Below $90 for First Time in 17 Months on Supply
- Rubber Slumps to 2009 Low as Producers Seen Needing to Do More
- Pork Wounds Heal as Hogs Profit From U.S. Corn Bust: Commodities
- Gold Climbs on Demand for Alternative Investment as Stocks Drop
- Europe Skirting Freeze Preserves Gas Stocks Amid Ukraine Crisis
- Copper Swings as Dollar Remains Near Highest Level Since 2010
- Corn Declines on Outlook for Abundant U.S. Harvest; Wheat Climbs
- Arabica Coffee Rises to One-Month High While Cocoa Futures Drop
- Saudis Cut OSPs Deeply to Regain Asian Mkt Share: Bernard Leung
- FinEx Capital Expanding in Commodities Led by Simon Smith
- OPEC ’Appears to Be Gearing Up for Price War’: Commerzbank
- Thailand Shifts Away From Buying Crops as Junta Tackles Reserves
- Pacific Sees Storm Deja Vu as Atlantic Starts to Run Out of Time
- Investors Pull Most Money From Commodity ETFs in ‘14 on Glut
- Gold Sales at Perth Mint Reach 11-Month High as Prices Retreat
The Hedgeye Macro Team
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