Trump Punt!

“When in doubt, punt!”

-John Heisman

While he didn’t author “The Art of The Deal”, Heisman had lots of experience re-writing the rules of US College Football. Over the course of his coaching career, he had plenty of mistakes to learn from. He was the coach at 8 different college teams!

Last week’s Healthcare Bill debacle wasn’t the first embarrassing loss of Trump’s deal-making career. And it certainly won’t be the last. If you’re a US growth accelerating bull, all this political “catalyst” did was provide you another buying opportunity. Boy did the consensus that’s been missing the move for the last 4-6 months need one.

Yeah. I know. Everyone who has been calling for US #GrowthSlowing had this bill as their catalyst for the stock market to go down all along, right? In other news, US Durable Goods and Capex growth accelerated to +5.0% and +2.7% year-over-year (y/y) growth on Friday. Both of those economic realities were in recession during Obama’s final year in office.

Back to the Global Macro Grind…

I can’t remember a Monday morning where US Equity Futures were down like this with mainstream media overtly blaming the President of The United States. It’s a good thing Trump was responsible for none of the up move.

I’ll give him partial credit for some of the ramp. Where most of the credit is due though was in the 5 quarter slowdown (from Q1 of 2015 when US GDP was +3.3% y/y to Q2 of 2016 at +1.3% y/y). Forget the Trump Punt – those are his GDP comps!

Yep, the cyclical and US profit recession (and the Energy crash/depression) all happened. Old Wall Media blamed none of it on Obama’s Administration. Since when was not passing a budget a bad thing for the stock market btw?

As always, the context of this politically driven US stock market correction trumps all tweets:

1. Last week’s US stock market (SP500) decline was only its 2^nd down week in the last 9
2. Last week’s -1.4% weekly SP500 decline represented 2/3 of its “correction” from the all-time-closing high
3. In terms of time and space, all-time remains a long-time @Hedgeye

That’s the best - when the stock market corrects for none of the reasons that the bears called for. And it wasn’t just the stock market that had an epic -1.4% correction. The US Dollar, Bond Yields, and Oil dropped too:

1. US Dollar Index was down -0.7% week-over-week and seeing follow through to the low-end of its risk range today
2. US 10yr Treasury Yield was down -9 basis points week-over-week to 2.41% and is at the low-end of its range today
3. Oil (WTI) prices continued lower, down -2.7% week-over-week and remain bearish TREND @Hedgeye

Unlike what I call counter-TREND moves (i.e. corrections within bullish intermediate-term TRENDs which USD, UST10yr Yield, and SPY are currently in), the #1 thing the bears should try to cling to isn’t politics – it’s called Reflation’s Peak:

1. Commodities (CRB Index) were down another -0.5% last week and have lost ALL of their 6 month reflation gains
2. Oil’s (WTI) -15% draw-down takes its 6 month return to 0% vs. the SP500 at +8.3% and UST 10yr +79bps
3. 5yr forward break-evens dropped another -5 basis points last week to +1.96%

And yes, I understand that some people think that US Dollars and Bond Yields only go up when inflation is accelerating. That’s true in what we call Quad2 (when both growth and inflation are accelerating, at the same time).

But Stocks, Bond Yields, and Dollars also go up, a lot, when REAL GDP growth accelerates. And that’s precisely what happens in what we call Quad1 (when inflation slows, sequentially, and real growth accelerates to new cycle highs).

That’s why on this epic -2.2% correction from the all-time SPY high, you shouldn’t be buying “Reflation” exposures like Energy, Commodities, and Industrials. You should be buying real growth sectors like Consumer Discretionary, Tech, and Healthcare.

What’s consensus thinking about that? Here’s the latest callouts from a CFTC futures & options positioning perspective:

1. SP500 (Index + e-mini) net LONG position was dropped by -65,502 contracts last week = +0.40x (1yr z-score)
2. Russell 2000 (mini) net SHORT position got shorter by -18k contracts to -40,760 last wk = -1.04x (1yr z-score)
3. 10yr Treasury net SHORT got less short by 129,389 contracts to -68,652 last wk = +0.05x (1yr z-score)

In other words, consensus sold growth expectations on the way down. While corrections (in stocks and bond yields) haven’t been numerous, this is what consensus has been doing all along. Consensus Macro clearly isn’t Bullish Enough on US growth.

Got growth accelerating data or political concerns?

With the advent of the US Durable Goods report for February, our predictive tracking algorithm has year-over-year US GDP growth accelerating to +2.33% and +2.76% in Q1 and Q2, respectively.

That Q1 #GrowthAccelerating (year-over-year) view imputes to a +2.51% q/q annualized GDP forecast for Q1 of 2017 vs. Bloomberg Consensus and Atlanta Fed forecasts of +1.9% and +0.9%, respectively.

When in doubt, consensus always punts on growth. That’s because you’d have to go all the way back to this time in 2013 to find buying opportunities that were met with the same follow through on real growth accelerating data.

Our immediate-term Global Macro Risk Ranges (with TREND views in brackets) are now:

UST 10yr Yield 2.34-2.64% (bullish)

SPX 2 (bullish)
RUT 1 (bullish)

NASDAQ 5 (bullish)

XOP 34.12-37.01 (bearish)

VIX 10.58-13.47 (bearish)
USD 98.75-101.70 (bullish)
EUR/USD 1.06-1.09 (bearish)
YEN 110.01-114.91 (bearish)
Oil (WTI) 47.04-49.55 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer