We’ve got some answers…
Each morning, Hedgeye CEO Keith McCullough reviews our asset allocation model for subscribers then breaks down the changes we made versus the prior day. As McCullough says in the video excerpt from The Macro Show above:
“The two big buckets of asset allocation that we’d be net long are U.S. equities and foreign currencies.”
Within U.S. equities, we like oil-related ETFs like Oil & Gas stocks (XOP) and the plain-old commodity Oil (USO). “We had oil and gas on sale earlier this week so XOP is our favorite high beta way to play energy stocks in particular.”
Essentially, after the -2% pullback in oil and gas stocks in the past week this is an efficient way to play our view that stocks are headed higher on U.S. growth is accelerating.
“Then on our favorite currency continues to be the ETF for the bullish position on the U.S. Dollar (UUP). Our second favorite currency is still FXB or the British Pound.”
The simple summation on these currency bets is that growth in both the U.S. and U.K. economies is accelerating.
We’d also short exposures that fall when the U.S. economy is growing, like Gold (GLD) and Long Bonds (TLT). Conversely, we think China is slowing so short big cap Chinese stocks (FXI).
Click here to watch The Macro Show from which this clip is pulled, in its entirety. Also, here’s some required reading on each of the aforementioned long and short ideas.
#Trump #SmallBusiness #Confidence
The election of Donald Trump has everyone from consumers, homebuilders and small businesses elated. Across each of these categories, confidence readings are through the roof. Apparently, the prospect of lower taxes and the removal of bureaucratic red tape has everyone excited.
Who'd have thought?
The electricity is palpable. In case there was any remaining doubt, the latest reading of the NFIB's Small Business Confidence index smashed Wall Street's tempered expectations.
The index yesterday showed a spike to 105.8, a level not seen since 2004, and a massive ramp from November's print of 98.4. "Warm up your neck before trying to look straight up at the DEC Small Business Confidence Print!," Hedgeye CEO Keith McCullough wrote yesterday.
Just look at the Chart of the Day below (maybe consider stretching those sternocleidomastoid and trapezius muscles before you take a peek).
#TrumpTrade #Economy #GrowthAccelerating
On yesterday's small business exuberance, the Nasdaq hit it's third day of all-time closing highs in a row. It's crystal clear why. Since November, U.S. economic data has brightened significantly. Whether you're looking at Durable Goods, Retail Sales, ISM (Manufacturing or Services indexes), or Industrial Production, all have been improving over these last few months.
That's been a boon for the U.S. economy. The third quarter GDP report of 2016 stopped slowing, rising to 1.7% year-over-year growth from a low of 1.3% in June. That capped five consecutive quarters of deceleration from the peak of 3.3% in March 2015.
Trumphoria rages on. We suggest buy U.S. stocks. Sell Gold (GLD) and Long Term Bonds (TLT) that perform poorly when U.S. growth is accelerating. There's no sense getting off this train just yet.
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If you’re looking for a catalyst that could send China’s flagging economy into a tailspin, here’s one: The People’s Bank of China is pulling money out of the system in an effort to defend the yuan. But that could have ramifications for the country’s overheating debt markets too.
#Trump #China #Protectionism #Trade
On the campaign trail, the President-elect threatened to “impose tariffs of up to 45%” on Chinese goods because under him the U.S. is “not playing games anymore.” Trump’s protectionist trade policies would, in fact, radically alter how the retail sector conducts business, by importing cheap goods from China to keep costs down.
If Trump gets his way and imposes aggressive tariffs (i.e. taxes on imports) or quotas (that limit on the number of imports of a particular good that can legally come into the States) it could have a devastating effect on retailers who have long benefited from importing cheap Chinese goods.
Before 1994, there were import quotas that limited the quantity of apparel the U.S. could import from non-World Trade Organization countries (China didn’t become a member until 2001). These measures were basically lobbied for by legendary investor Warren Buffet and others who, after acquiring North Carolina-based apparel manufacturing plants, which were threatened by cheap Chinese labor.
Those quotas began to be phased out in 1994. Seizing an opportunity, Chinese apparel manufacturers cut deals with U.S. manufacturers to pour Chinese made goods into the states.
That’s precisely what happened, says Hedgeye Retail analyst Brian McGough in the video above. “China’s share of total U.S. apparel imports, troughed at 8% [in 2001] and went up to 39% over a decade,” he says, pulling up a chart. At the same time, import costs plunged. During the 1990s, we saw the cost of apparel come down by 5-10% per year – every year for two decades.
$XRT $KSS $JCP
This has been a boon for the weakest brands in the space, like Kohl’s (KSS) and JCPenney (JCP), McGough says, which probably wouldn’t exist today were it not for cheap Chinese imports.
As we’ve pointed out before, there’s reason to worry about Trump's potential trade policy changes. In a foreboding sign of the protectionism to come, President-elect Trump named Peter Navarro as Director of Trade and Industrial Policy. This guy literally wrote the book Death by China, describing the threat that China’s form of capitalism and militarism poses to the future of the U.S.
In short, the probability that Trump’s protectionist policies get passed isn’t zero. There is historical precedence that suggests this retail risk is serious and worth monitoring (and not the ramblings of some deranged liberal).
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