This note was originally published at 8am on September 22, 2014 for Hedgeye subscribers.
“Where is the lightning to lick you with its tongue?”
That’s another great quote from the latest #behavioral book I have been cranking through – The Rise of Superman, by Stephen Kotler. It’s also the perfect aphorism for one of the most epic US stock market days I’ve witnessed in my career.
Did the thunder and lightning of the Ali-Bubble lick you on Friday? Rising like a phoenix to market caps greater than General Electric (GE) and WalMart (WMT), the BABA licked someone, big time, at $99.70 (top tick of the day).
But what’s dropping $25 billion dollars or so in a few hours of trading amongst friends? Never mind it dropping to $90 intraday. As long as you owned it at $68, you crushed it. “Behold” the IPO bubble. “He is the lightning; he is the frenzy.” –Nietzsche
Back to the Global Macro Grind…
All the while, amidst Friday’s frenzy, the rest of the global macro market did not cease to exist. After the SP500 had herself an epic outside reversal, the Long Bond (TLT) rallied and the Russell 2000 got licked for a -1.4% drop on the day.
In one of the more peculiar “secular bull” markets (or whatever they’ve been calling a market that’s gone up for 5 years), the Russell 2000 is now down for 3 consecutive weeks and -1.4% for 2014 YTD (vs. the slow-growth Long Bond TLT = +12.9% YTD).
“So”, now the question is, has the licking in illiquidity already begun?
Illiquidity, as in small caps that trade by appointment – but usually on big volume, on down days (when everyone has to get out at the same time)… if you have been long 1 of the 41% (stocks in the Russell that have had greater than 20% declines), you get what I mean.
Perhaps this is Mr. Macro Market’s message: if you’re going to get long of the frenzy, you should just buck up and go big cap like the BABA and the Facebook (FB). If you’re going to pay 18-28x revenues for something, you might as well be able to get out!
We call this small cap vs. large cap performance gap a Style Factor Divergence. When I worked at Magnetar Capital, our “book” would be characterized this way. If you were long “size” as a style factor, you’d be long big caps. I would definitely have that on right now.
In terms of protecting my personal net wealth, the biggest “size” bets I tend to gravitate to are:
- Long-Term Treasuries
- Equity Short Sales
Not everyone rolls that way. Call me conservative, but when I hear the thunder rolling in, I don’t wait around for the performance-chasing lightning!
Here’s another big cap “size” bet that was working last week:
- US Healthcare Stocks (XLV) +1.7% on the week to +17% YTD
- Vs. MSCI REITS Index -0.3% on the week to +12.9% YTD
As many a big cap Portfolio Manager has reminded us this year, they love our Long Bond (TLT, EDV, etc.) call but can’t get really long of stocks-that-look-like-slow-growth bonds (Utilities and REITS) because they aren’t big cap stocks in their benchmark.
As a Global Macro Risk Manager, my benchmark is not losing money. You can dial up plenty a broker/banker to tell you what to chase on the long side. I’m the one you pay while they are sleeping. I’m the one who surveys the land before dawn.
Another interesting macro divergence last week was:
- European Stocks (EuroStoxx 600) +1.2% on the week to +6.2% YTD
- Emerging Market Stocks (MSCI Index) -0.5% on the week to +5.4% YTD
I call it interesting because I think you fade the fear on that trade too. In other words, you buy EM on the dip and sell European Equities on the bounce. My research team and I will explain why on our Q4 Macro Themes call, which we’ll host on October 2nd.
The upshot of our current call has mostly to do with phase transitions in both growth and inflation. We think that both the Russell 2000 and the 10yr bond yield (down 3bps last week and -45bps for 2014 YTD) look a lot like Europe and US inflation – slowing.
And while you may have never experienced thunder and lightning when everyone is tilted to the levered long side of a performance chasing boat, you have seen both growth and inflation slowing (at the same time) before. It was Q3 of 2008. Now that was a frenzy!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.62%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer