TODAY’S S&P 500 SET-UP – November 26, 2014
As we look at today's setup for the S&P 500, the range is 54 points or 2.28% downside to 2020 and 0.34% upside to 2074.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Today's Chart of The Day shows the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind. To most of our “rate of change” fans, the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…
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“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”
Travis, how about a massage? Or some turkey day beers and, bonds?
Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!
That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.
Back to the Global Macro Grind…
In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.
To most of our “rate of change” fans, the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…
Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:
BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”
In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.
#PermaBull says pardon?
Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).
This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!
Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):
Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.
#Tah-dah! Get growth’s rate of change right – and you get bond yields right.
My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.
It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.22%-2.33%
WTI Oil 73.03-77.04
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on November 12, 2014 for Hedgeye subscribers.
“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius —and a lot of courage —to move in the opposite direction."
-E. F. Schumacker
The most challenging thing to do as a stock market operator is to make a trade or investment against consensus. If you are wrong for any period of time, you hear about it in spades. Especially in this day and age when every Jamoke under the sun has a soapbox and/or a twitter feed. (Admittedly, though, we do applaud the democracy that Twitter has brought to the media world!)
The fact is, the harder consensus leans, the higher your probability of being right in fading that view. Conventionally speaking, one way in which this is manifested is in value investing. Now, to some, value investing is about deep dive company analysis, which we get, but on a higher level it is really about the implications of company valuation. Simply put: when a company’s valuation is high, the prospects for its future are perceived as rosier than when the valuation is low. (That is a simplification, but you get the point.)
In effect, valuation is an opinion, so when the vast majority of stock market operators give a company a low valuation, their opinion of that company is low. Ironically, or not, this consensus opinion is consistently wrong over the long run. In fact, Dreman Value Management proved this in spades in a study of “cheap” stocks:
Now valuation is obviously only one factor, and not always the best factor for shorter term tactical trading, but over the long run it is a great gauge of the consensus opinions of companies. And over the very long run, fading well loved “names” as based on high P/E multiples has provided enormous outperformance.
Back to the Global Macro Grind...
This morning it is not difficult to find the consensus view of U.S. equities. The II Bulll Bear Spread (bulls minus bears) is +99% to the bullish since October 12th. As well, Bears are tracking near all-time lows at 14.8%. If you are a lemming, of course, this makes sense. As markets go up you get more bullish and as markets go down you get more bearish. Practically speaking, as we highlight in the Chart of the Day, chasing this rally is fraught with risk given how unconvincing the volume has been.
Complacency seems to once again be setting into the view of European equity markets as well. We’ve seen a few notable chart followers suggest the turn is in for European equities and today they may have some fodder for the case with Eurozone Industrial production, which beat expectations.
Specifically, Eurozone September Industrial Production rose by +0.6% year-over-year versus the consensus view of -0.3%. This compared to the August reading, which was a -0.5% decline (also an upward revision from -1.9%). As well, the German economic minister was out this morning saying that the “German economy stabilized in Q3 after a Q2 contraction and now has slight upward momentum”. Now, of course, if this is the best the Eurozone can do, fading any rally is certainly worth considering.
Over at the Bank of England today, the honest Canadian, BOE Governor Mark Carney, is at least being forthright in saying, "it’s appropriate that markets now expect easier monetary conditions” based on the real-time growth and inflation data the BOE is seeing. The challenge with easier monetary conditions for many global central banks is that while they are not out of bullets, the bullets are increasingly ineffective.
Yesterday we hosted a call for our Institutional Macro subscribers with Professor John Taylor from Stanford on this very topic. Taylor is an outspoken advocate for rules based central banking (hence the eponymous Taylor Rule) and also highlighted in spades a point we’ve been harping on for some time, which is that the extreme QE monetary policy in the U.S. has became increasingly ineffective. As Taylor noted on QE3:
“When started 10-year Treasury was 1.7%, then rose and has remained higher
– 1-year vs 10-year US Treasury spread
– 2003-2008 non-QE period……1.3%.
– 2009-2013 QE period……………2.4%”
It obviously begs the question of whether the biggest no-brainer “Fade Trade” has become to fade the increasingly impotent global central banking regime? You likely already know our answer on that.
If you’d like to listen to the replay of our discussion with Professor Taylor, the replay and his presentation can be accessed below.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.26-2.39%
WTIC Oil 75.61-78.97
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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