Marginal Events

“Marginal events turned out to be the ones of most significance.”

-Matti Friedman

While you can apply the aforementioned quotes to most sand-pile theories (real-world Phase Transitions are like watching grains of sand fall on a pile of developing risks), that one is about the Middle East in the early 1990s.

“In the 1990s many people in Israel thought peace was coming, and if you look through old newspapers you’ll find lots of news about peace negotiations. People were talking at the time about a ‘new Middle East’… it turned out that what was happening in Lebanon was both the new Middle East and the new real war.” –Pumpkin Flowers, page 18

Friedman’s story is one that I am in the middle of reading and it’s a good example of why I read so much about risk in places other than where the mainstream-manic-media is trying to politically and myopically focus our attention. While I didn’t think Trump’s Tax Plan was going to “over-deliver” on market expectations, I don’t see it as the event that is most significant.

Back to the Global Macro Grind…

I didn’t say Trump’s tariff and tax plans are not significant. What I’ve been trying to say, for nearly 6 months now, is that the actual (hard and soft) growth, inflation, and profit cycle data is most significant.

Even if I prioritized my politics over my risk management process what, precisely, would I have heard yesterday that would change my mind? For a small business owner like me, is cutting my tax rate to 15% the end of my world?

Sadly, “if you look through” the Old Wall’s “newspapers” and listen to the white noise they generate on TV, “you’ll find lots of news” about nothing other than their own political biases, anchors, and general confusion/anger about rising stock markets.

There remains a ton of money to be made analyzing the marginal macro and company specific events away from that.

In real, timestamped market news, the Russell 2000 ramped the Trump Bears a new one yesterday, closing at an all-time high of 1419 with the underlying Russell Growth (IWO) component leading the way. What does that mean?

1. If you shorted the Russell at the higher-low it saw (1354) Easter weekend, you’ve already lost 5% of your money
2. If you shorted the Russell last week, you were part of a crowd that had the largest net SHORT position in 2.5 years
3. If you short the Russell at the top-end of its 1 risk range, I’ll call that a good decision this morning

An even better decision would be to book gains on the long-side and pivot into some US Dollar exposure (UUP) and/or Municipal Bonds (MUB), but I already told you that yesterday. Move on, Mucker (that’s with an M). Move on…

What are some of the new marginal events in macro today? Let’s take a twirl around the world:

1. JAPAN – Kuroda’s BOJ stuck with easy money overnight; the Yen Down, Nikkei Up TREND is back in business
2. SOUTH KOREA – if you shorted it on “North Korean Concerns”, that was not good – new highs (again) this morning
3. CHINA – Shanghai Comp has mustered 3 marginal “up” days in a row, but is -3.5% in the last month
4. NEW ZEALAND – stocks up another +0.4% overnight and +4.8% in the last month (no one in MSM knows or cares)
5. EUROPE – equities finally seeing a correction post the exhaustion signal we issued yesterday, Spain -0.75%
6. UK – London not liking a fresh YTD high of $1.29 for the Pound, FTSE -0.5% today and -0.6% in the last month
7. COMMODITIES – Reflation’s Rollover Theme intact, CRB Index -0.11% yesterday and -3.7% in the last 6 months
8. OIL – breaking down through @Hedgeye TREND support of $49.21 WTI – could be a domino for macro risks
9. GOLD – correcting -0.5% to the low-end of my $1/oz risk range; good spot to buy some
10. 10YR – US Treasury Yield pulls back to 2.30% after tapping the top-end of my 2.17-2.36% risk range

*Note: the word trump wasn’t in any of points 1 through 10

Profit Cycle Update:

1. 202 of the SP500’s names have reported their respective quarters
2. Aggregate year-over-year SALES growth remains solid at +4.4% y/y
3. Aggregate year-over-year EPS growth remains excellent at +12.8% y/y

If you can find the word trump in any of these earnings releases, let me know. Most people who are making a ton of money right now are focused on growth companies seeing accelerations. That’s what happens in Quad 1.

Exact Sciences (EXAS), for example, is what consensus bears call “expensive”… and you know I love expensive when it’s getting more expensive. They just beat and raised this morning. The stock is indicated up +15% with 29% short interest.

No mention (on the margin or otherwise) of Trump’s tax plan, tariffs, or hair in the release… and our Healthcare Research Team, led by Tom Tobin, will reiterate that as a Best Idea Long (Institutional Research product), on the non-fake news.

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

UST 10yr Yield 2.17-2.36% (bullish)

SPX 2 (bullish)
RUT 1 (bullish)

NASDAQ 5 (bullish)

XOP 34.07-36.89 (bearish)

Nikkei 188 (bullish)

VIX 10.01-12.61 (bearish)
EUR/USD 1.05-1.09 (bearish)
YEN 109.05-111.59 (bearish)

GBP/USD 1.26-1.30 (bullish)
Oil (WTI) 47.91-50.95 (bearish)

Gold 1 (bullish)
Copper 2.50-2.61 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer