“No soldier could face either danger or responsibility more calmly than he.”
-Ulysses S. Grant
That’s what a young Lieutenant Grant had to say about one of his mentors during The Mexican War (1), General Zachary Taylor. “He was known to every soldier in his army, and was respected by all.”
What impressed Grant most about Taylor was his “demeanor in the face of danger… these are the qualities more rarely found than genius or physical courage.” (American Ulysses, pg 86)
Patience and calm… are these the qualities you find in your Founder, CIO, and/or Portfolio Manager? Or have the last 4 months of US growth accelerating and volatility crashing agitated them politically and affected them emotionally?
Back to the Global Macro Grind…
You want to talk “valuation”? Legitimate leadership is wildly undervalued in this profession. And since many of you have provided me positive feedback on historical lessons in leadership, I’ll try to provide more of those as we march through 2017.
In what “hedge funds” in a New York Times article have called “dangerous times” for the US stock market (read: some of the Trump haters who are under-performing YTD), US stocks just had their 5th straight week of gains.
Yep. That’s 5 straight weekly gains for the SP500 (+0.7% last week) and 4 straight weeks of appreciation for the US Dollar. Instead of whining politically about it, since most hedgies cited in the article are paid in Dollars, I’ll remind them they’re winning!
But, but… “interviews with more than a dozen money managers, 9 predicted a market decline… managers argue the market has priced in a best-case scenario…”, blah, blah, blah.
From God’s lips to the NYT’s biased-sample-sized ears, I’ll bet that all 9 of those hedge fund operators aren’t up anything close to +6.4-9.1% YTD (i.e. the YTD return of US Equity Beta in SP500 and Nasdaq terms). So they should keep on arguing.
I realize many of these people are geniuses and that it takes a lot of courage to invest other people’s money alongside a political view, but I can’t for the life of me understand why very few managers we read about just say something like:
‘Since US growth is finally accelerating again, we have a pro-growth market where the Dollar, Rates, and Stocks should continue to go up, at the same time, until both GDP and profit growth stops slowing.’
Back to what happened on the scoreboard last week:
- US Dollar Index was +0.4% on the week (up for the 4th straight week = bullish TREND @Hedgeye)
- Yen (vs. USD) was -1.6% on the week (Nikkei Up on Yen Down – Japanese Stocks = bullish TREND too)
- Commodities (CRB Index) continued their recent struggle vs. #StrongDollar, down -0.6% week-over-week
- Oil (WTI) corrected another -1.2% last week, but remains bullish TREND @Hedgeye
- Gold dropped -2.5% last week, resuming its bearish TREND since Trump’s Election
- Copper was flat week-over-week at $2.69/lb and remains bullish TREND @Hedgeye
- UST 10yr Yield ramped +17 basis points on the week to 2.48% and remains bullish TREND
- Financials (XLF) were up another +2.3% last week and remain bullish TREND like Bond Yields do
- Utilities (XLU) were down -0.1% in a broad based “up week” for US Equity Beta
- REITS (MSCI Index) were down -1.4% and remain bearish TREND @Hedgeye like Utes are
This all happened in the face of crashing US Equity Volatility (front-month VIX down another -4.4% last week and -22% YTD) and elevated implied US Equity Volatility Premiums of +39% and +58% for the SP500 and Nasdaq (vs. 30-day realized), respectively.
Not to be confused with something you don’t hear consensus macro hedge funds whining about: Oil prices, where the market not only has a massive net LONG position but an Implied Volatility DISCOUNT of -7% vs. 30-day realized volatility…
When you see articles calling for corrections in what consensus isn’t long, that’s why implied volatility is trading at a massive premium – everyone who’s missing the up-move is positioning for a correction that hasn’t occurred!
Looking at positioning (CFTC futures & options), here’s the current consensus:
- SP500 (Index + E-mini) net LONG position finally popped +56k contracts last week = +0.46 on a 1yr z-score
- Russell 2000 (mini) net LONG position was cut by -17k contracts last week = +0.40x on a 1yr z-score
- Crude Oil’s massive net LONG position was reduced by -23k contracts last week = +2.05x on a 1yr z-score
In other words, AFTER the ramp, consensus has been forced to cover some shorts and get longer in SP500 terms, but has become a lot less bullish in US domestic smaller/mid cap (Russell) terms. So it’s a good time to re-ramp your Russell (IWM) exposure!
When you buy the Russell (IWM) you get what I really want in Q1 and Q2 of 2017 (as we compare against the all-time lows in US Bond Yields = Q2 2016) and that’s more net LONG exposure to the Financials (XLK, KRE, BAC, CFG, etc.).
Sure, a nice big pullback in everything that hasn’t pulled back in a month would be nice. And since I’m quite sure under-performing hedgies will be covering shorts on those pull-backs (not getting shorter) I’m happy to stay calm, carrying on as a growth bull.
Our immediate-term Global Macro Risk Ranges are now (intermediate-term TREND views in brackets):
UST 10yr Yield 2.41-2.53% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 37.07-39.37 (bearish)
RMZ 1153-1192 (neutral)
Nikkei 19067-19634 (bullish)
DAX 110 (bullish)
VIX 10.57-12.34 (bearish)
USD 100.90-102.25 (bullish)
EUR/USD 1.04-1.06 (bearish)
YEN 112.58-114.97 (bearish)
Oil (WTI) 52.54-54.76 (bullish)
Nat Gas 2.61-2.96 (bearish)
Gold 1 (neutral)
Copper 2.64-2.76 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
