“Whereas religion asks us to believe in something, money asks us to believe that other people believe in something.”
-Yuval Noah Harari
I’m back in the saddle this morning and I have to make a confession. I did a dangerous thing for the past 10 days. I shut off my screens and did a lot of reading and thinking. Dangerous if you want me to believe the consensus that growth has “bottomed”, that is…
Update: it hasn’t.
If the economic (GDP falling to 1%) and profit cycle (SP500 Earnings currently -8.1% year-over-year with 130/500 companies reporting) data wasn’t so bad, those begging for Dovish (Fed) Dollar Devaluation wouldn’t believe in buying commodities/stocks here either.
Back to the Global Macro Grind…
For those of you who haven’t had large positions in #GrowthSlowing since the 1st of the year, last week Mr. Macro Market provided you what might be the last big buying opportunity before US GDP goes from 1% to something negative:
- US 2yr Treasury Yield bounced +8 basis points last week to 0.82% = down -23 basis points YTD
- US 10yr Treasury Yield bounced +14 bps last week to 1.89% = down -38 bps YTD
- Utilities (XLU) dropped -3.2% (worst week of the year) to +9.4% YTD
So, in the Hedgeye Asset Allocation Model, I’m taking our Fixed Income (long term bonds and safe/liquid equity yields that look like bonds) exposure up to 91% of my max allocation this morning.
Do (or did) you believe that growth would slow this fast, from 3% to 2% to 1%?
Or did you believe in it so clearly that you knew that the Financials (XLF) would start Earnings Season with the following reality:
- 32 of 90 “Financials” in the SP500 have reported their respective quarter
- Aggregate Earnings (non-GAAP!) are currently -17.0% year-over-year
- Financials (XLF) had their “reflation” rally now too (back to -1.2% YTD)
Since permanently bullish US stock market storytellers want to go “Ex-Energy” on the profit story (but not on the contribution of Energy Stocks to the “reflation” rally), to believe the bulls from this price you:
- Have to look at corporate profits “Ex-Financials” (90 Financials in the SP500 vs. 40 Energy companies)
- Have to start begging the Fed for another “rate hike” (like they did when they bought the Financials in December)
Rate hike? Man, wouldn’t that mess up the Dovish (Fed) Dollar Devaluation story consensus is rolling with right now!
Here are the current TRENDING (90-day inverse correlations) of a Down Dollar (USD Index) of -3.6% YTD:
- SP500 -0.53
- CRB Commodities Index -0.88
- Oil -0.70
In other words, with:
- SP500 +0.5% last week to +2.3% YTD
- CRB Index +3.5% last week to +2.0% YTD
- Oil (WTI) +4.8% last week to +7.4% YTD
The Hedgeye case for #GrowthSlowing has to be really right to get the Fed even moarrr dovish from here and power the components for the “reflation” squeeze higher. Squeeze? What are you, an idiot? You aren’t long a ton of illiquid and levered MLPs?
Forget being long Energy stocks (but maintaining “Ex-Energy” as a narrative) that was +5.5% (XLE) last week, MLPs were +10.9%, baby! Yeah, you have to forget that these stocks put a lot of people out of business in the last year to get with the program and just believe.
Some other things (that we don’t like) that really ramped while I was out last week were:
- Japanese Stocks (Nikkei) +4.3% on the week to -7.7% YTD
- Italian Stocks (MIB Index) +2.4% on the week to -12.4% YTD
- Greek Stocks +5.4% on the week to -4.0% YTD
So, in the Hedgeye Asset Allocation Model, I’ll also reiterate a net 0% asset allocation to International Equities this morning. Being out of European and Japanese stocks in this year has been as important a call as our call to short the Nasdaq (QQQ) on March 31, 2016.
Ah, man. Did you have to go there dude and remind people that the Nasdaq closing down -0.6% last week (down -2.0% YTD) was second only to Chinese stocks (down another -3.9% on the week to -16.4% YTD) of the major indexes in the losing money column?
Chinese demand hasn’t “bottomed” inasmuch as #LateCycle Big Cap “Tech” hasn’t stopped slowing from last year’s cycle peak. Tech does not look good. Ask the chart chasers what they believe after last week’s move in Google (GOOGL) and Microsoft (MSFT) on that.
Don’t ask me. I’m just the macro guy reiterating #TheCycle call and asking you to believe what I have for the past 9-10 months.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.70-1.90%
Oil (WTI) 40.35-44.39
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer