Burn The Wagons

This note was originally published at 8am on November 25, 2014 for Hedgeye subscribers.

“We should burn what wagons we have, on order that our cattle not be our generals.”

-Xenophon

 

According to ancient Greek #history, that’s what an emerging Athenian leader, Xenophon, told his men they should do as they marched against their Persian King. “Moreover, let us also abandon other superfluous baggage, except what we have for war or for food.” (Xenophon: The Anabasis of Cyrus, pg 108)

 

Yep. That’s the stuff I am reading these days. If you want to call it my confirmation bias in being bearish against central planning overlords (i.e. that this will not end well), I’m cool with that.

 

Buying the Long Bond (TLT) is as close as I am going to get to war with US and global growth bulls. And I probably won’t stop riding this bearish growth view, until the US elects to burn the yield chasing wagons – letting rates rise.

Burn The Wagons - growth cartoon 10.08.2014

 

Back to the Global Macro Grind

 

In case you didn’t know that one of the only ways out of this centrally planned Liquidity Trap (Total US Equity Market Volume was -29% versus its YTD avg yesterday) is to stop doing what didn’t work, now you know. Or at least the bond market does…

 

BREAKING (updated growth “survey” from Hedgeye): US 10yr Treasury Yield is ticking down to a fresh November low of 2.29% this morning and the Yield Spread (10yr minus 2yr yield) has compressed towards its 2014 YTD lows of 176 basis points this morning.

 

These are clean cut #GrowthSlowing signals. But you already know that.

 

What you also know is that at this stage of the central planning war, equity markets going up really has nothing to do with real-growth anyway. It has everything to do with Japan, Europe, USA, China, etc. trying to resuscitate drowning inflation expectations.

 

On that real-time score, as you can see in today’s Chart of The Day (US TIPS, 5 year Breakevens), so far… no good.

 

While the 2 day China rate cut “pop” in everything inflation expectations that’s been dropping was fun to watch, it didn’t change #Quad4 Deflation expectations. Both global growth and inflation expectations are still slowing, at the same time.

 

Other than one of the Fed’s preferred ways to monitor #deflation expectations (Breakevens), here’s what else I’m looking at:

 

1. US Dollar Index vs both Burning Yens and Euros = +10% YTD

2. CRB Commodities Index -0.7% yesterday to -4.6% YTD

3. WTI Oil flattish this morning at $76.01, down -17% YTD

4. Copper flat this morning at $3.01/lb, down -10% YTD

5. Russian Stocks (RTSI) -1.2% this morning to -23.3% YTD

6. Energy Stocks (XLE) down (again) -0.8% yesterday to -0.8% YTD

 

Then, of course, you can look at some late-cycle stuff like US wage Inflation… where 2/3 of the country has seen real wages deflate since the Fed undertook their unprecedented Policy To Inflate (see Federal Reserve’s own papers on the matter for details).

 

Or you can just find a “survey” that tells you something that has been the complete opposite of the wage deflation and no-capex cycle data. And say that the “market is up” on something like that.

 

But when you say “market” don’t forget that my preferred risk adjusted market to be long in 2014 (Long Term Treasuries) has had a much higher absolute return on much lower realized volatility than US small/mid cap stocks have.

 

Even if the July to October +160% ramp in the VIX is forgotten (for now), that doesn’t mean that the non-linear and interconnected economic risks associated with #Deflation Expectations Rising cease to exist.

 

What also exists as of this week is non-survey computed options positioning in Global Macro (non-commercial CFTC futures and options consensus positioning):

 

1. SP500 (Index + Emini) has moved to its biggest net LONG position since late SEP at +29,110 contracts

2. Long Bond (10yr Treasury) hit its biggest net SHORT position of 2014 at -128,032 contracts

3. Oil still has a net LONG position of +276,213 contracts, only down -12,971 week-over-week

 

“So”, what does that tell us?

 

1. After shorting the OCT lows, hedge funds have covered their shorts and are chasing the bull run in SPY (again)

2. Consensus Macro continues to think the risk in interest rates is to the upside (we reiterate downside!)

3. Perpetual expectations for another central plan (OPEC) remain for a non $65 oil price

 

Since Consensus Macro is not my expectations general, I say you burn the groupthink wagons and do the exact opposite of where those options are positioned: BUY Long Bond (TLT, EDV, etc.), and SHORT SP500 (SPY), Oil, and its related stocks and bonds.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.28-2.34%

SPX 2018-2072

RUT 1154-1190

EUR/USD 1.23-1.25

Yen 117.03-119.16

WTI Oil 73.04-77.51

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Burn The Wagons - 11.25.14 EL Chart


Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

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