“One of my great mentors, Frank Meyer, stressed to me that many businesses are cyclical over time.”
-Ken Griffin
That’s the last lesson I wanted to highlight from an excellent markets book I’ve been reviewing this year: Efficiently Inefficient. This may be the last time anyone who has invested in “Tech” since 1 gets to learn the lesson that Tech is cyclical too!
We all make mistakes in this business; especially short-term ones. But very few of us build real big businesses by not learning from the big mistakes. The biggest lessons of my career have been learned by studying #TheCycle.
The title of this note is a rhetorical question. Of course Tech Revenue and Earnings growth is cyclical. If you successfully risk managed the economic cycle peaks of 1999 and 2007, you didn’t get sucked into the final rallies in the Nasdaq (or SP500) in the 1st half of 2000 and 2008. And you probably didn’t chase the “charts” in March of 2016 either.
Back to the Global Macro Grind…
It’s a good thing none of the “home gamers” out there in America own Apple (AAPL).
In July of 2015 (when we initially went bearish on the SP500 and AAPL), in terms of both the number of people and its market cap, it was obviously the most over-owned stock in human history.
It won’t be after today.
Maybe a “buying opportunity”? Probably (lower). Apple has a lot of the Style Factors I want to own (big cap, liquidity, eventually low-beta). But we patient investors now have the luxury of being able to wait and watch for lower-prices as #TheCycle plays out.
Damn that cycle!
“Stocks” rallied off their lows yesterday on more terrible US economic data (US Dollar went DOWN in response, Oil Up):
- US Durable Goods “missed expectations” coming in at -2.5% year-over-year in MAR (i.e. #recessionary)
- US Consumer Confidence slowed (again) from its Q1 2015 Consumption Cycle Peak to 94.2 APR vs. 96.1 MAR
Ex-people-saying-global-demand “bottomed” in Q1 on the most cyclical components of the US economy (newsflash: demand did not bottom; Oil prices are trying to), the latter report on confidence is not going to be resuscitated by AAPL -8% on the open.
While most Americans don’t own stock market funds and Fed fueled “reflation” indexes anymore (yeah, the 2000 and 2008 cycle peaks did leave some crazy people cautious), a lot of Americans own single stocks like AAPL, NFLX, and GOOGL.
That’s why I think it’s going to be a lot harder to stop Consumer Confidence from doing what it always does after the economic, profit, and stock/credit market cycle peaks. See Chart of The Day – it takes the elevator up during the cycle, then it crashes.
“So”… as the Old Wall likes to say, here’s the new bull market narrative:
- Ex-Financials
- Ex-Tech
- Ex-Biotech
The new bull case for America is Janet Yellen burning the US Dollar back to 1-year lows, ramping the cost of living (rent, food, gas prices, etc.) again, and having everyone swap their Apple into Exxon.
Btw, you know what > $46 Oil does to GDP, right?
It slows real GDP even faster.
Yes. It’s elementary math (it’s called the GDP Deflator), but for those of your friends who are telling you that Down Dollar, Up Oil is the next panacea, just remind them that as inflation rises during a cyclical-slow-down, you get this thing called #Stagflation.
#Stagflation (Quad 3 in our GIP – Growth, Inflation, Policy – Model) is good for Energy stocks, but horrible for stock market multiples. In fact, even the beloved Buffett struggled with owning stocks during the late 1970s stagflation.
Think about why that is.
It’s as simple as Hedgeye going bearish on the Nasdaq (QQQ) on March 31, 2016. It’s #TheCycle (just like it was in March of 2000 and 2008) stupid. Tech is cyclical. And as the cycle slows, the Fed gets dovish and devalues the purchasing power of The People.
As The People have less, they get less confident. As confidence crashes, eventually “demand has bottomed” expectations crash too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.71-1.95%
SPX 2060-2105
NASDAQ 4
VIX 13.01-18.07
USD 94.01-95.42
Oil (WTI) 40.98-45.02
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
