Avail Us From Consensus

“I wish to avail myself of all that is already known…”

-Wilbur Wright


That’s a quote from the latest history book I’ve cracked open – The Wright Brothers, by David McCullough (unfortunately, no relation!). Wilbur was the older of the two brothers. Born in 1867, he wrote the aforementioned to the Smithsonian Institution, in 1899.


The Smithsonian Institution, “established in 1846 for the increase and diffusion of knowledge” is run by the US Government. I’m going to write them a letter, availing myself of all linear forecasting relics used by both the Old Wall and the United States Federal Reserve.


If all you looked at was the US stock market last week, your economic forecast would have gone up. Unfortunately, commodity #Deflation and a compression in the US Treasury Yield Spread didn’t corroborate the permanently bullish (consensus) US GDP outlook.


Avail Us From Consensus - bear gdp


Back to the Global Macro Grind


What’s most interesting about being a contrarian on either the corporate profit cycle and/or US GDP #GrowthSlowing into the 1st half of 2016 is that you don’t have to avail yourself of the data that is already known.


That’s right. It’s all right there, sitting right in front of you. In rate of change terms, data “dependence” hasn’t been so clearly bearish on both inflation and growth expectations (at the same time) since the 2nd half of 2008.


Maybe that’s the new bull case.


If it’s not, maybe it was the ECB’s Super Mario (Draghi) devaluing the Euro (again) last week. If you’re not long commodities and/or their linked cash flowing expectations, that is.


With the EUR/USD down another -1.2% to -12.0% YTD last week, here’s what happened in FICC (Fixed Income, Currencies, and Commodities):


  1. US Dollar Index closed up another +0.6% on the week, taking it to +10.3% YTD
  2. Japanese Yen was -0.1% week-over-week, taking it to -2.5% YTD
  3. Canadian Dollar was deflated another -0.2% on the week, taking it to -12.9% YTD
  4. Commodities (CRB) Index deflated to new 2015 lows, -0.6% on the week to -20.1% YTD
  5. Oil (WTI) continued to crash, closing down another -1.2% week-over-week at -30.9% YTD
  6. Copper crashed another -6.1% last week, taking its 2015 #Deflation to -27.8% YTD


That’s right. The same things that blew out credit spreads at the end of the summer are still in motion. Here are three more things to consider on that front:


  1. Industrial Supply/Demand – Nickel deflated another -5.1% week-over-week, taking its crash to -41.5% YTD
  2. Food Supply/Demand – Wheat prices dropped another -1.6% on the week, taking it back into crash mode at -20.8% YTD
  3. Yield Spread – US Treasury 10yr Yield MINUS 2yr Yield = 135 basis points wide, -9 bps on the week, and -16bps YTD


Yeah, that last one kind of sucks. If you’re this character at the San Francisco Federal Reserve, that is. His name is Williams, and he puffs his central planning chest out whenever the SP500 is up, talking up rate hikes (and he deflates when the SP500 is down).


On that score, with the SP500 bouncing +3.3% last week (after closing -3.6% in the week prior), the US stock market has been “up” 3 days in the last 13, so that’s encouraging. When you look at best vs. worst US Equity Sector Styles last week:


  1. US Tech (XLK) popped +4.3% to +6.9% YTD
  2. US MLPs (Master Limited Partnerships) continued to crash -1.2% week-over-week to -30.0% YTD


It’s a good thing the Old Wall and its bankers got everyone out of those levered upstream E&P companies that had “dividend yields.”

What really worked last week was what has been working all year long – here were the Top 3 Style Factors (Mean Performance of Top Quartile vs. Bottom Quartile in SP500 companies):


  1. Good Balance Sheet Stocks (Low Debt) were +3.9% last week = +3.6% YTD
  2. Low Short Interest Stocks were +3.4% last week = +3.6% YTD
  3. Top 25% Sales Growth Stocks were +3.3% last week = +6.4% YTD


Yep. This happened at the end of #LateCycle 2007 too. “Cheap” (cyclicals) got cheaper. Expensive (this time is different) got more expensive.


The last thing we were waiting to avail ourselves from was consensus hedge funds (those who were levered long at the all-time #bubble highs in July and shorted the September lows to the highest net short position of the year) covering their shorts.


From a CFTC non-commercial positioning perspective (futures and options contracts), the net short position in the SP500 (Index + Emini) got +15,419 longer last week, taking the net short position in that consensus “hedge” down to -120k contracts from its SEP peak of -280k.


Short low. Cover high. That’s been the 2015 consensus too.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.18-2.36%

SPX 2040-2108
RUT 1138--1192
EUR/USD 1.05-1.07
Oil (WTI) 39.22-43.36
Copper 1.99-2.13


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Avail Us From Consensus - 11.23.15 EL chart

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