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“Getting to the top is optional. Getting down is mandatory.”

-Ed Viesturs

Thinking about hiking? Some people love (d) the idea. You know, hiking into a global and local slow-down. Sounds like a great idea, until the stock market goes down on that news too.

Since Janet Yellen has no experience hiking interest rates, I thought I’d channel some of the wisdom of the only American to have reached the top of all 14 of the world’s greatest mountain peaks – Ed Viesturs.

The Fed should have been raising rates when US economic growth was accelerating (mid-2013 to late 2014). It missed its window to act objectively. The bond market hasn’t believed Yellen can raise rates (all year-long). And it doesn’t today either.

Rate Hiking - 3  yield Godot 07.27.2014

Back to the Global Macro Grind

After crashes across many macro markets continued last week, the IMF decided to fade Janet this morning and cut their Global Growth forecasts (again) for both 2015 and 2016.


Yes, as in > 20% declines from the cycle/bubble peaks (there have been 3 major ones to climb going back to 1). While being long at the top of Biotech #Bubble was optional, getting drawn-down (-22%) since July’s peak was mandatory.

While the SP500 tried having a rate hike party on last Friday’s open, neither the Russell 2000 nor the Nasdaq were buying into the hype/hope, at all. They looked a lot more like Chinese, German, and Emerging Market stocks – not good.

Rate hike or no rate hike? Who cares – stocks are now going down on both.

In US stock market terms, here’s how the week-over-week looked within the context of the last 3months:

  1. SP500 -1.4% week-over-week, -8.1% in the last 3 months
  2. Russell 2000 -3.5% week-over-week, -12.5% in the last 3 months
  3. Nasdaq -2.9% week-over-week, -8.3% in the last 3 months
  4. Healthcare (XLV) -5.7% week-over-week, -12.1% in the last 3 months
  5. Basic Materials (XLB) -4.0% week-over-week, -18.9% in the last 3 months
  6. Utilities (XLU) +1.2% week-over-week, +2.9% in the last 3 months

That’s the first time that Healthcare (led by the Biotech crash) has been worst with Utilities first, in a long time. That’s mainly because everyone owns Healthcare now, and there was a lot of performance chasing to that relative strength top.

When money managers are forced to chase performance, stocks (and their style factors) accumulate a lot of consensus beta risk. Bearish market beta then starts to eat that alpha, alive.

If you look at the US Equity Style Factors that did the worst last week, they continue to look a lot like what we’ve been trying to keep you away from for the last 3 months:

  1. High Beta Stocks were down another -3.0% week-over-week (-15.5% in the last 3 months)
  2. Small Cap Stocks were down another -2.9% week-over-week (-13.9% in the last 3 months)

*Mean performance of the Top Quartile of SP500 performance vs. Bottom Quartile for the given style factor


The alternative to chasing “reflation” beta (Energy, Industrials, Basic Materials, etc.) and/or wicked high #Bubble beta (Social Tech, Biotech, Technical “Charts”, etc.) has been:

  1. Long-duration Bonds
  2. Low-Beta Stocks
  3. Stocks with liquidity (and low-beta) that look like bonds

Yes. I sound like I am repeating myself this morning. Because my competition, who has been long “reflation” and rates rising (Industrials and Financials) is repeating themselves too. And I’ll keep doing that until #LateCycle stops slowing.

Back to the concept that a rate hike “is just 25 basis points” and “we should just do it”, only people who don’t do Global Macro can be complacent about what an abrupt #StrongDollar move does during an economic slowdown (hint: it’s deflationary):

  1. Emerging Market Stocks (MSCI) were -5.3% last week, crashing -20.5% in the last 3 months
  2. Latin American Stocks (MSCI) were -8.6% last week, crashing -27.3% in the last 2 months
  3. UST 5yr-forward Break-Evens dropped -11bps to 1.09%, crashing -61bps in the last 3 months

With “inflation” expectations crashing, the Fed would definitely have to stretch way outside of its mandate/framework to reach for the top of those “rate hike” expectations in December.

On the growth front, you’re one more rate of change slowing US jobs report and/or a big Q3 GDP slowdown away from the bond market (and stock markets, worldwide) reminding you that taking rates down is mandatory as the cycle slows.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.07-2.21%

RUT 1122-1160
EUR/USD 1.10-1.14

Gold 1130-1160

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Rate Hiking - z cod 09.28.15 chart