No Cowbell?

“When there is trust, conflict becomes nothing but the pursuit of truth.”

-Patrick Lencioni


That’s one of the better risk management and leadership thoughts that came out of The Advantage – a book I just finished reading this weekend. For those of you looking for help refining and/or reworking your #process, it’s worth your time.


Far from its constitutional mandate established in the Federal Reserve Act of 1913, this Fed’s thought process appears to very much include what the US stock market is doing on any given day in order to give the market clarity on their decision making process.


When markets were on their lows last week, both the NY and Atlanta Fed heads (Dudley and Lockhart – both voters) went dovish. Then, post the bounce, Vice Chair Fischer went hawkish in his Jackson Hole speech on Saturday. In other words, no #cowbell.

No Cowbell? - Jackson Hole cartoon 08.238.2015


Back to the Global Macro Grind


To be clearer than they have been (Fed Fund Futures, which measure the probability of a SEP rate hike, have been trading all over the place in the last week), there should be very little trust that the Federal Reserve is in pursuit of anything but pro-cyclical truths.


Pro-cyclical means that #LateCycle economic readings look “really good” at the end of the cycle. Since things like employment and “wage growth” are already slowing in rate-of-change terms, you’re one bad jobs report away from #truth there.


But, if the S&P Futures are up – we’re “all set” and readying for the 1st modern Federal Reserve rate hike, into a slowdown. I’m sure consensus is right and that “won’t be a big deal” at all. It’s “just 25 basis points.” And Q3 GDP might just be 0.1%.


The scarier part of last week’s bear market bounce was that it was led by markets that are, well, in bear markets!


  1. Oil (WTI Crude) was +11.8% on the week, but remains -22.5% in the last 3 months (and is -2.3% this am)
  2. Russian Stocks (RTSI) were +8.9% on the week, but remain -16.2% in the last 3 months (-2.6% this am)
  3. Energy Stocks (XLE) were +3.5% on the week, but remain -16.2% in the last 3 months (will lead lower this am)


And most of this is wasn’t based on anything other than the mid-week begging for more Federal Reserve, European Central Bank, and Chinese #Cowbell… so, we’ll reverse some of that “reflation” this morning as Stanley Fischer pivoted from saying that “market volatility affects our timing” (on Friday) to “we shouldn’t wait for 2% inflation” (on Saturday).


But, since it’s in every cycle-top’s consensus character to chase bounces as opposed to selling them, on the way down today we’re going to have less people who are hedged. That’s right, less. Check out the consensus hedges in CFTC non-commercial options:


  1. SP500 (Index + Emini) net SHORT position dropped to its lowest in 3 months, +86,285 on the wk to -40,845
  2. EUR/USD net SHORT position dropped to its lowest of the year, +29,934 on the wk to -59,250


In English, that means:


  1. Why the Worst May Be Over” (cover of Barron’s on US stocks) had bears covering and bulls getting longer
  2. Consensus Macro was betting the Fed was going to be MORE dovish than the Europeans (ECB)


And, since less people trust that this morning than they thought they could on Friday, the pursuit of expectations continues…


Where else might you have risk this morning? Look no further than US Equity Market Style Factors that looked a lot like Fed/Reflation speculation last week:


  1. High Short Interest Stocks got squeezed +2.2% off the lows, but are still -9.7% in the last 3 months
  2. High Beta Stocks bounced +2.9% off the lows, but are -12% in the last 3 months


Like Oil, Russia, and Brazil (Bovespa +3.1% on the week, but still -12.6% in the last 3 months), these Style Factors (High Short Interest and High Beta) in your portfolio had what we call a head-fake bounce (if you’re bearish) or a positive divergence (if you’re bullish).


So, as Ray Dalio would ask, what is the truth – head fake or the new bull market?


It’s definitely a bull market in long-term US Treasury Bonds. In today’s Chart of The Day we show you how well the Long Bond has done versus something that we have not liked (the Russell 2000) going back to 2014.


Much like another place we have not liked during this #Deflation phase transition (Junk Bonds), small and mid-cap stocks also have one of the top risk factors you want to protect against during an economic slowdown – liquidity.


What is the #truth about market liquidity right now? Have we, as a profession, told the world what is really going on here on that risk factor? Has the Federal Reserve? Without #Cowbell, but plenty of obvious Liquidity Traps, who do you trust?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.99-2.22%

RUT 1085-1193
VIX 20.12-43.28
EUR/USD 1.09-1.16
Oil (WTI) 36.99-45.32

Gold 1110-1167


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Cowbell? - z bird 08.31.15 chart

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