“Every fractal is the logical expression of a few straightforward ideas.”
-Benoit Mandelbrot
While it might be “fascinating” to have spent all of 2017 trying to call a US stock market top using fancy sounding “leading indicators”, there have been a few very straightforward ideas that could have saved you from trying to out-smart the market.
If you’ve had the rates of change in both growth and inflation right, you didn’t have to be so smart getting a lot of other things right.
When it comes to making macro calls, I’m a simple guy. Fractals simplify the complex using a 3-letter code of construction. “In simple fractals there is the initiator, generator, and a rule.” (The Misbehavior of Markets, pg 128)
Back to the Global Macro Grind…
Do you like having a repeatable #process? Or are you more of a Macro Tourist type, running after one “data point” or pundit “call” to the next? How about rules? Does your process have rate of change rules, across durations?
If you don’t want to boil the ocean on all of that this morning, that’s ok – but here are some of my simpler rules:
- When US growth is #accelerating, don’t short growth stocks on “valuation”
- For macro markets, valuation is not a catalyst – rates of change in both growth and inflation are
- If the causal factor perpetuating multiple expansion or compression changes, change your position
Another pretty straightforward rule @Hedgeye would be to never make macro calls based on PMI and/or ISM survey forecasts. The main reason for that is that these are A) diffusion indexes and B) survey based in nature. Both A & B make them highly un-predictable.
Some of our competitors like to think they have some magical ability to forecast PMIs and ISMs. That’s nice. I like to compete with those perceptions. None of them called for the ISM to hit a 161-month high yesterday.
While we don’t inaccurately forecast things like that, we do incorporate the data (once it is reported) into the @Hedgeye Predictive Tracking Algorithm to recalculate our growth and inflation forecasts. That’s why our forecasts change, to the decimal point, daily.
For those of you interested in contextualizing a 161-month high ISM (Institute of Supply Management) report yesterday:
- That was a SEP report and the 161-month high of 60.8 followed the 76-month high of 58.8 in AUG
- The New Orders component of ISM ramped to 64.6 in SEP from 60.3 in AUG
- The Employment component of the ISM got above 60 for the 1st time in 76 months
- The Prices Paid component of the ISM ripped to 71.5 in SEP from 62.0 in AUG
And for those of you looking to contextualize what these numbers actually mean to Wall Street:
A) > 50 and rising signals expansion
B) < 50 and falling signals contraction
Therefore readings with 6 and 7-handles in front of them should render anyone’s call for sub 50 readings for the last 10-15 months either dead wrong and/or useless.
What was useful was A) respecting the reflation rally we saw in SEP 2017 and B) realizing that the combination of inflation rising (sequentially) and growth accelerating (on a TRENDING basis) would:
- Turn the Fed Hawkish (Fed funds Futures have rocketed to YTD highs of 70% probability on a DEC hike)
- Stops the US Dollar’s descent at its pre Irma #Hurrican lows after holding long-term @Hedgeye TAIL support
- Ramp US Rates and Bank Stocks in kind
- Rip the Russell 2000 (26% of it = Financials) higher
- Help the US stock market make freshly squeezed all-time highs, daily, after a super shallow correction last week
That’s right. The Russell 2000 is super-rate-sensitive. And yes, the SP500 has rate sensitivity too. On both INFLATION and GROWTH #accelerating, here’s what’s happened in the last month:
- UST 10yr Yield is +19 basis points to 2.36%
- SP500 +2.3%
- Russell 2000 +7.4%
And while that “value” component of the Russell has really ripped on a relative basis, being long US Growth has continued to deliver the bacon to the data dependent crowd on an absolute basis too.
The Russell Growth (IWO) was +1.3% yesterday to +17.7% YTD. And one of our favorite 2017 US Growth exposures (Biotech Stocks, IBB) ramped another +1.5% yesterday to +27.6% YTD.
Yes, we are competitive. We’re on your team. We want to help you win. As you review and evaluate your research budgets for 2018, we trust that you see both the relative value and growth in the Hedgeye #Process. If there’s anything we can do to help, please let us know.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now as follows:
UST 10yr Yield 2.24-2.37% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
RMZ 1141-1165 (bearish)
VIX 9.21-10.55 (bearish)
GBP/USD 1.32-1.35 (bullish)
Oil (WTI) 49.90-52.55 (bullish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
