"That said, the top will be the top, and it’s hard to predict when it will happen."
-David Einhorn
That’s a great risk management quote from an article Bloomberg ran last night titled “Einhorn’s Greenlight Warns of Bubble as Tax Reform Hopes Dim.” Tops are processes, not points, indeed.
I have as much respect for David Einhorn, his investment team, and process as anyone in the league. On two important scores, I actually agree with him. Yes, the all-time highs are bubbly. And no, Trump Tax Reform ain’t gettin’ done anytime soon.
That said, I’ve been long US growth and profits accelerating against the backdrop (base effects) of their Q2 2016 cycle lows. I’m short “reflation” too. That doesn’t mean I’m buying stocks up here. I’m selling rips after buying every damn bubble dip.
Back to the Global Macro Grind…
In the last few days, I’ve been “raising cash” and re-investing those equity gains into both US Dollars and Munis. Yep, bubble boy here signaled buy Municipal Bonds (MUB) on the pullback yesterday. I don’t do the money under my mattress thing.
I’m 18 years into this and I’ve seen many very large and very, very, big bubbles. I built this firm shorting them, but the thing about those bubbles is that if you could have been long them before they became even bigly-er bubbles, you’d have crushed it.
My best answer in timing the “when it will happen” (as in the topping process), is to wake-up each and every day sequencing both the growth/inflation/profits data and macro market signals themselves.
When US growth (and profits) stop accelerating (on a trending basis), this bubble is going to pop and drop, hard.
Need an example of a former Bernanke Bubble that popped, then reflated, and is dropping again? How about Commodities (and their related equity bubbles), priced in devalued US Dollars?
That’s right. All we needed to see for those prices to drop was Reflation’s Peak then Reflation’s Rollover. If you model macro like we do, that peak and rollover started in late FEB and early MAR. It’s now obvious in both market signaling and data terms.
Back to the whole Trump Trauma thing. As you all know, I’m neither a Republican nor a Democrat. I am Canadian. And I’m not even upset about the lumber thing. My brothers and sisters in The North will get over that, eh.
Inasmuch as the Stanley Cup Playoffs resuming tonight will trump tariffs as Canadian headline news, I think the rate of change in US growth, inflation, and profit data will continue to trump the Trump hope.
Hope is not a risk management process.
And if you are long bubble stocks on the hope that Trump is going to get Tax Reform done today... the Hedgeye Washington Policy Research Team that I bought last year (Potomac Research Group in D.C.), wrote this yesterday:
TAX MAN COMETH: Trump is scheduled to release his tax plan tomorrow and it will likely resemble the plan he proposed throughout the campaign. Additional details are trickling out, but it looks as if Trump plan will consist of three income tax brackets of 12 percent, 25 percent, and 33 percent in a move that aims to shift tax benefits from the wealthy to the middle class. The biggest opposition Trump will face is over the corporate tax rate which is headed towards 15% in the proposal. Sight unseen, Senate Finance Chairman Orrin Hatch has already indicated that a 15% rate will not make it through the Senate and we suspect team Trump is sticking with his campaign number as their starting salvo. To add some sweeteners to try and win some Democratic votes there will likely be an infrastructure component as well as Ivanka Trump’s child care tax credit - but that won’t be enough to offset resistance to the proposed corporate rate. What’s missing? A border adjustment tax - and that’s likely to set off infighting amongst Republicans with support spearheaded by Ways and Means Chair Kevin Brady.
Our Chief Political Strategist, JT Taylor, wrote that. And like me, he writes a political strategy and insight note at the top of every risk management morning (ping if you’d like our Policy Research).
But do you think, for one second, that I read what our policy and/or bottom-up research analysts write in the morning and automatically anchor on that, making it my macro market position?
Are you crazy? Political policy is just one of many factors to be considered in a multi-factor, multi-duration, macro model. Sometimes it’s actionable. Sometimes it’s not. Timing matters.
What makes this morning’s setup interesting is that:
A) US Equities just made all-time highs (again) and are signaling immediate-term TRADE overbought
B) The Implied Volatility Premium in the SP500 has dropped (in 2 weeks) from +108% to +2%
C) And Trump Hope is about to get a reality check
No, timing markets is not easy. But that’s what I do and predicting topping processes gets less hard when you have research edges that help contextualize bubbly price levels within the context of macro catalysts and their embedded expectations.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views) are now:
UST 10yr Yield 2.18-2.36% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
VIX 10.30-12.75 (bearish)
USD 98.50-101.04 (bullish)
EUR/USD 1.06-1.09 (bearish)
YEN 108.00-111.59 (bearish)
Gold 1 (bullish)
Copper 2.50-2.60 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
