“Always Forward, Forward Always”
-Luke Cage & Pop, Marvel’s Luke Cage
I just watched the whole 1st season of Iron Fist
The kids passed out last night after dinner and I’ve been meaning to watch it, so I Netflix’ed and Chilled, solo, through all 13 episodes.
…. And now it’s now …..
You know how E =MC2 just feels right? …. it has some certain but amorphous aesthetic elegance that touches your inner physics-phile and vouches for its veracity.
Binge watching is like that but in a dystopian instant gratification, new-tech, millennial experience curation, digital entitlement kind of way.
It does just feel right though.
Back to the Global Macro Grind ….
How about Binge Investing?
If you think about how our risk management process works, binge investing is probably a sufficiently apt distillation.
Buy at the Low End of the range, Sell at the High End.
Individual companies, commodities, equity sectors, whole markets = Same process. And when beta is overbought/oversold the binge-iness becomes particularly pronounced.
Take this past week, for example, as it provided a nice case study in proper binge etiquette for those indulging in the occasional risk management bender.
At the highs last week, the market (& most of its constituents) moved to immediate term overbought, we unloaded long exposure, raised cash and took our immediate-term “Top Longs” list down to zero.
We’ll selectively repopulate that list as prices correct and get binge-ier on the buys in names that we like as beta approaches the low end of the risk range.
Booking gains, en masse. It just feels right.
Alright, moving on, 2 main points this morning:
ISM: Not a lot of softening of the “soft” data, yet as the Headline held at 57 and the Employment subindex rose to its highest level since June 2011. In microcosm, the internals of the March report capture our broader outlook on Reflation dynamics.
- Prices Paid: Reflation’s Peak going out in style with Prices Paid closing Q117 at a 71-month high of 70.5 on the Index. We don’t see much in terms of persistent upside from here as commodity/industrial base effect support begins to wane and domestic/global inflationary pressures crest.
- New Orders: New Orders dipped half a point but remain strong at the 64.5 level on the index. Continued, multi-month strength in New Orders accords with the increase in employment and suggest Current Production will remain solid over the nearer-term (i.e. It makes the -5.3pt drop in the Current Production reading less alarming). Realistically (& empirically), it’s unreasonable to expect a sustained ramp from current levels. Indeed, there have only been 3 instances over the last 50 years in which New Orders have had a multi-month streak above the 65-level and just a single (early-cycle) 4-month streak in the last 30 years. Again, middling should be the baseline expectation as we comp out of the industrial and commodity price recession and the mean reverting nature of diffusion indices takes hold.
Auto Sales: Auto Sales disappointed with unit sales dropping -5.38% sequentially. The implications are a few fold:
- This will drag on next week’s Retail Sales data for March. Auto’s (price X volume) represent ~20% of headline Retail Sales so assuming a static mix, the decline in unit sales will represent a roughly 1% drag on the headline.
- Auto-related manufacturing activity carries an ~6% weighting in the Industrial Production series. Assuming declining sales & rising inventories feedback negatively on production, falling demand should manifest as a modest drag on industrial production growth. It’s also likely to show up in total consumer credit as lower sales equate to lower auto loan originations.
- The peak in auto sales appears to be in and that is notable. However, historically, peak auto sales are more of a mid-cycle phenomenon so the cresting in vehicle demand isn’t a particularly acute concern from an expansion longevity perspective.
So, what should you take away from yesterday’s duo of high frequency data?
- The labor and demand data remains strong. We expect this to remain the prevailing reality through at least May as underlying improvement and favorable comps support continued strength.
- Reflation’s Peak has been discounted and Reflation’s Rollover has begun to get priced in. We expect that to continue as the domestic economy transitions from Quad 2 to Quad 1.
Lastly, given that I’ve been up for most of the last 24 hours, there’s also the distinct possibility that my analytical alacrity is highly questionable and that data contextualization is just hollow drivel.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.31-2.49%
SPX 2
Nikkei 180
DAX 12040-12392
VIX 10.97-13.21
EUR/USD 1.06-1.09
Oil (WTI) 48.45-51.21
Gold 1
Copper 2.58-2.68
To coffee … and binge caffeination.
Christian B. Drake
