[UNLOCKED] Early Look: Inhaling All-Time Highs?

Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on July 11th. Click here to learn more.

“When I was a kid I inhaled frequently. That was the point.”

-Barack Obama

I don’t inhale frequently. In fact, I didn’t inhale at all as a kid. And I’m certainly not about to start smoking the wacky tobacky as an adult (telling you to chase the SP500 at an all-time high) now.

Not to be confused with all-time closing highs that actually have double-digit year-over-year returns (i.e. the Long Bond)… or the Nasdaq and Russell 2000, which are -5% and -9%, respectively from their all-time highs established last year around this time… if the SP500 closes > 2130, regardless of the mix or spin on it, the beloved SP500 will close at an all-time high, baby!

Even though we’re going to print it on decelerating-volume (Total US Equity Volume was -8% and 11% from its 1-month and 1-year averages on Friday) and slowing employment and profit growth, you can pretty much tell yourself whatever you want on the why. Reality is that this is called beta. And unless you’re long the #GrowthSlowing stuff, beta has been tough to beat.

Back to the Global Macro Grind…

When I grew up in the hedge fund business, my bosses only cared about generating alpha. Being beta was what pioneers of low-fee funds (Vanguard) were achieving. We had to generate alpha frequently because alpha justified our premium fees. That was the point.

Going on 18 years later, when it comes to consistently generating alpha across macro market environments, these days we hear a lot more whining in our profession than we see people winning. That’s created a huge opportunity for new leaders to emerge.

Since we went super bullish on US #GrowthAccelerating at the end of 2012 (loved growth stocks, shorted the Long Bond and Gold, etc.) and rode it through the end of 2013… then went the other way… I don’t have to spend a lot of time apologizing for mediocrity.

And trust me, I can be beyond mediocre when I’m wrong. I just don’t like to stay wrong… and then beg central planners for beta.

This weekend, one of my more thoughtful clients sent me a simple note (no it didn’t ask why I was the moron who “missed Friday’s move”). He said, “KM here’s the Total Return Since 12/31/2013”:

1. Long Bond (TLT) +50.2% at average 10d Realized Volatility of 12.7%
2. US Equity Beta (SPY) +22.2% at average 10d Realized Volatility of 12.7%

When legitimate “long-term” investors audit, measure, and map what’s actually happened since the US corporate #ProfitCycle peaked in mid-2014, they come to understand that Low-Beta-Safe-Yield has absolutely crushed both US and Global Equity Beta.

What’s next?

The #1 reason why you won’t see me chase US Equity Beta this week is that our #1 Q3 Macro Theme is the #ProfitCycle slowing faster than Consensus Macro thinks. That starts Thursday when JP Morgan (JPM) reports Earnings.

Since the Financials (XLF) are our favorite short (or underweight) at -3.8% YTD (and nowhere near all-time highs), why would I change that view this morning?

1. Is US monthly non-farm payroll growth 11,000 (May) or 287,000 (June)?
2. Do I care if the TREND call on US #EmploymentSlowing remains firmly intact?
3. Did the Bond Market care about the equity market’s visceral reaction to the jobs print?

Interestingly, but not surprisingly, the 10yr US Treasury Yield finished DOWN on Friday at 1.36%. That capped off a week where the 10yr Yield fell another 9 basis points week-over-week to an all-time weekly closing low. That’s down 91 basis points YTD.

Trending #GrowthSlowing? Yep. That’s why, inclusive of Friday’s US Equity Beta Chase (vs. Nasdaq -1% YTD):

1. Utilities (XLU) are still +21.4% YTD and making weekly all-time highs
2. Gold (GLD) tacked on another +2.1% last week to +28.7%

How about staying away from the April-May “Reflation” chase and sticking with our less volatile Dollar Up, Rates Down call?

1. US DOLLAR – up another +0.6% last week and now +3% in the last month
2. OIL (WTI) – down another -7.6% last week and now -14% in the last month

Yep. I’m going to stay with that. That’s another longer-term call we’ve stayed with since 2013.

No, we don’t have to inhale every “up” market move. We don’t have to rely on calling the “market” ex-GlobalStocks-Bonds-FX either.

Rather than inhale every little wiggle in the SPY for the last year (chasing up moves and freaking out on down ones), we just have to stay with our winners. Ride them. And breathe.

For patient Global Macro investors and risk managers alike, that is the point.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.33-1.53%

SPX 2084-2139

NASDAQ 4824-5014
USD 95.19-97.01
Oil (WTI) 45.05-47.72

Gold 1305-1386

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer