Bull Market, Man

“If it is, it is. If it’s not, it’s not.”
-Ziggy Marley

Last night the legend Ziggy Marley graced downtown Stamford (or as we locals like to call it Stamvegas) with his upbeat musical presence.  Despite the rain, the crowd danced away and let the music take over the night.  With the positive reggae vibes and adult beverages flowing, it was difficult for even a past-his-prime 43-year old concert goer like myself not to enjoy the atmosphere.

If you enjoy listening to music, you are in good company.  Late in his life Charles Darwin remarked, “If I had my life to live over again, I would have made a rule to read poetry and listen to some music once every week.” But music is more than just an enjoyable experience it also has a myriad of health benefits.

1. Music makes you happier – Research has proven that when you listen to music, your brain releases dopamine, a “feel-good” neurotransmitter.  A neuroscientist at McGill University actually quantified this when she injected music lovers with a radioactive substance that binds to dopamine receptors. A PET scan after listening to their favorite music showed massive amounts of dopamine released.
2. Music helps you sleep better – A recent study showed that students who listened to relaxing classical music for 45 minutes before going to sleep slept significantly better than students who listened to an audio book or did nothing.  For the 30% of you who suffer from insomnia, this is something to consider.
3. Music lowers stress and increases longevity – Listening to music reduces the levels of stress hormone cortisol in your body, which counteracts the impact of chronic stress. This is important because stress causes up to 60% of all of our illnesses and disease.   Further, actively participating in music boosts the immune system even more than listening passively.

So for all you stock market operators that are feeling some of the natural stress from dealing with markets every day, turn on some music, man.

Back to the Global Macro Grind…

The bull market in U.S. equities is now on its eight year.  Considering that a bear market, as noted by a correction of 20% or more, happens on average every 3.5 years, this recent bull-run is one for the record books.   But that doesn’t mean this bull market is over, man.

In the Chart of the Day, we show a long term view of the SP500 going back to 1950.  Over time, the biggest risk to investors has been underperformance due to ignoring or doubting the potential for bull markets to run.  As an example, from 1982 to 2000 the SP500 experienced a return of over 1,000%.  If you missed any significant part of that, you are probably no longer in the stock market operating business.

In the short run, our call of #Quad1, higher growth and lower inflation, should continue to make bears at risk of becoming road kill.   Dallas Fed President Kaplan (who is a voter) corroborated this idea of lower inflation in an essay published yesterday in which he wrote, “I would like to see some greater evidence that we are making progress toward meeting our 2% inflation objective.”  This obviously corroborates with our view that inflation is likely to be contained, if not decelerate, in the short term.    

The data also corroborates our view this morning as June CPI came in at, wait for it, 0.0% versus the consensus call of +0.1%.  Even ex-food and energy CPI was downright disinflationary at +0.1%.  Even if Chair Yellen sees this all as “transitory”, it’s going to be very difficult to make the case to raise rates with inflation so muted. 

On the topic of lower inflation, a report by Bloomberg out this morning highlighted the impact that electric cars will have on oil demand.  As the report noted, OPEC recently quintupled its forecast for sales of plug-in electric vehicles and most major oil producers have also raised their forecasts dramatically in the past year.  According to the Bloomberg report, oil demand could be reduced by 8 million barrels by 2040 because of electric vehicles, which is more than the combined production of Iran and Iraq.

This doesn’t necessarily make us wildly bullish on the outlook for electric vehicles.  In fact, Tesla (TSLA) remains on our Best Idea list as a short and is down roughly -10% since we added it.  Industrials sector head Jay Van Sciver published a note earlier this week summarizing his thesis.   One key component of his thesis is simply that Tesla is about to lose its tax credit competitive advantage.  As Jay notes:

“Established equipment markets have seen almost no competitive entry for decades; important structural hurdles typically preclude entry into markets like automobiles and electrical equipment. As Tesla's tax credits are exhausted, existing car makers can introduce EV models with as yet unused tax credits, adding to their already substantial edge.”

Shorts without catalysts are always challenging, but the rolling off of tax credits and new product releases have the potential to change the bullish euphoria around TSLA rather quickly.

Even as many research providers are taking the summer off, Hedgeye is ramping up research production.  The calendar next week is full and includes the following:

1. July 17^th 11am – Technology speaker call with Jeff Shealy the CEO of Akoustis
2. July 17^th 1pm – Healthcare Q3 Themes call
3. July 18^th 10am – Thought leader call on the future of food retail with Kara Rubin
4. July 18^th 11am - Blackbook call on Hanes Brands (HBI)
5. July 19^th 1pm – Blackbook call on Starbucks (SBUX)
6. July 19^th 3pm – Themes call featuring our entire policy research team
7. July 20^th 11am – Blackbook call on Drug Pricing
8. July 20^th 1pm – Blackbook call on Costco (COST)

Just another slow summer week at Hedgeye next week! Email if you are an institutional subscriber and would like to join these calls.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.18-2.39%
SPX 2
NASDAQ 6173-6291
VIX 9.58-11.24
USD 95.02-96.56
Oil (WTI) 42.78-47.21
Gold 1

Keep your head up and stick on the ice,

Daryl G. Jones
Director of Research