The Visible Hand

“It is a magnificent feeling to recognize the unity of complex phenomena which appear to be things quite apart from the visible truth.”

-Albert Einstein

 

“What is the truth,” you ask? Well, on being long China, Bridgewater’s Dalio says he’s #out. Or at least that’s what it says on the front-page of the WSJ (Wall Street Journal) this morning. A market that you can’t get out of, really Ray?

 

Meanwhile, on the front-page of the CSJ (China Securities Journal) this morning, there’s a new chapter of the communist government’s centrally-planned-market-manifesto, trumpeting the benefits of their “visible hand” in the stock market!

 

Adam Smith, eat your heart (and invisible hand) out, buddy.

The Visible Hand - China cartoon 07.07.2015

 

Back to the Global Macro Grind

 

Halt I say, halt! If the “chart” breaks, show those price momentum boys the hand, ladies. Or was it the ladies that were all amped up about anything with liquidity and a “good looking” chart (i.e. price momentum as a Style Factor) prompting the boys?

 

Who knows. What we do know is that if you’re:

 

A)     Levered long anything “value” that is hidden within the visible truth of #StrongDollar Deflation and/or

B)      Long what you thought was “Low Beta” but is actually trading with wicked high #deflation beta

 

You’re probably not having as good a month as the cool boys and girls who were long Google (GOOGL), Amazon (AMZN), and Facebook (FB).

 

Sure, Apple (AAPL) rocked the alpha-cart some yesterday. But as long as the other ones never go down (imagine that?), the big cap liquidity + growth investing style factors are rocking anything that’s cyclical + slowing.

 

Enough about Style Factoring (modern day risk management tools that a large % of PMs don’t use) your portfolio as a means of explaining the unity of complex phenomena already, KM… let’s talk about some ideas. Show us your picks!

 

In Real-Time Alerts, here’s what I’ve had on the LONG side this week:

 

  1. Hologic (HOLX) – still one of our Best Ideas in the Healthcare sector; Tom Tobin held a call on it again yesterday
  2. US Housing (ITB) – alongside Healthcare, has been one of our Top 3 fav sector exposures for all of 2015
  3. Utilities (XLU) – hasn’t been a favorite for 6 months, but is morphing back into one (alongside REITS)
  4. Long Bond (TLT) – remains the best long-term idea as a way to express growth and inflation slowing
  5. Starbucks (SBUX) – long-time favorite that looks every bit as good (and overbought) as Google and Amazon

 

Then in our INVESTING IDEAS product (weekend product with longer-term ideas) we still have names like General Mills (GIS) that has pretty much every Style Factor a PM would need right now (Big Cap, Low-Beta, Nice Chart).

The Visible Hand - BENNY 07.23.15 chart

 

But I’m not going all style factor on you – I promise! (isn’t that a visible truth)

 

Lots of our SHORTS have been working… especially the stuff:

 

A)     That looked like “value” but has

B)      Commodity #Deflation and

C)      Debt (leverage) #Deflation

 

Like Chesapeake (CHK)… there was a lot of perceived “value” in the “dividend”, I guess, until they cut it this week.

 

#Deflation is not a typical “style factor” that my former quant partners in Chicago would use. That would be a “Macro Idea” to them, and they “don’t do macro”, because they think that’s making a market call (they don’t like those).

 

I personally love making macro market calls – because, eventually, all of the Big Macro Themes find themselves implied in style factors that many quants have to chase anyway.

 

Put another way, Macro Phase Transitions (think points of market entropy, waterfalls, and yes, breaking the 50-day moving monkey) are where most of the non-linearity lives. They sometimes happen slowly, then all at once.

 

What’s not working for me right now is the short call on the US Financials (XLF). For now, this is where the style factors (shorter term) are colliding with my Macro Theme (longer-term) work. In other words:

 

  1. I’m short the Financials because I think rates will back off (again)
  2. Many Financials are #LateCycle stocks with late-cycle earnings
  3. Most levered parts of FICC (Fixed Income, Currencies, Commodities) imploding is bearish

 

And yes, rates backed off at lower-long-term-highs for the umpteenth time (2.31% 10yr Yield in US Treasuries this morning) as Fed Fund Futures back off SEP rate hike expectations…

 

And yes, both Junk and High Yield that is levered to #Deflation retested YTD lows alongside Commodity exposures yesterday…

 

But the Financials (XLF) were +0.75% on the day to +3.4% YTD…

 

So either the bond market (spread risk rising as the both the economic and profit cycle slows – yield spreads compressing too) has it right or the equity quants chasing (Big Cap, Low Beta, Nice Chart) 1-3 month price momentum do.

 

And I have this magnificent feeling that the bond market’s invisible long-term growth and inflation hand still has it right.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.22-2.39%

SPX 2100-2130

VIX 11.81-16.42
USD 96.71-98.56
Oil (WTI) 48.63-51.19

Gold 1079-1130

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

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