“The Efficient Market Hypothesis was responsible for the emergence of the index mutual fund business.”
-Andrew Lo
Do you agree with that statement? That’s from Andrew Lo’s recent economics book, Adaptive Markets, where he does a nice job recounting the history of what I’d say is Establishment Economics. That’s what Paul Samuelson taught us newbies @Yale back in the 1990s.
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“The Efficient Market Hypothesis follows a simple chain of economic logic to its counterintuitive conclusion. Cardano’s Martingale, Bachelier’s Random Walk, Samuelson’s proof, and Fama’s statistics all lead to the same place: prices must fully reflect all available information.” (pg 26) |
I’m not going to write you a doctoral thesis on this today. I’ll just remind you that back in the 70s, 80s, and 90s (i.e. when we didn’t have this thing called Regulation Full Disclosure), “available information” had a different legal definition than what it has now. While some are still willing to risk going to jail, less are willing to trade on inside information today than ever before.
Back to the Global Macro Grind…
Back in November and December of 2016, when US Growth Stocks (Tech in particular) were correcting, what if you had a legal informational edge that:
A) Headline US GDP Growth would have a 3% handle on it within 6-9 months and …
B) The start of Q3 EPS season for the Nasdaq would have EPS growing +127% year-over-year?
I’d say you’d have been buying every damn dip in Tech, Biotech, Nasdaq, etc. all year long and would be having a crusher year.
Where are we on both A and B this morning?
A) Post yesterday’s sequential acceleration in US Industrial Production Growth, our proprietary US GDP predictive tracking algorithm ticked up to +2.31% y/y GDP for Q3 which imputes +3.16% headline (q/q SAAR) vs. consensus of 2.4%
B) 10% of the Nasdaq 100 names have reported aggregate year-over-year SALES and EPS growth of +21.3% and +127.4%, respectively
And you thought I was cherry picking yesterday when I gave you S&P 500 year-over-year EPS growth of +14.3%, ha!
If you’ve been on the right side of this, it’s ok to have fun with it. This profession is far too stressful to not enjoy when very obvious causal factors affecting market prices are going your way.
Causal factors like GDP and Corporate Profit Growth are what they are. What they are not are market prices. On that front this morning, the scoreboard reads:
- All-time closing high for the SP500 of 2559
- Nasdaq closing 1 point inside its all-time closing high of 6624 (established on Monday)
- UST 2 Yield Treasury Yields ripping a multi-year high of +1.56%
Oh boy. Could that last market price be telling us something we should already know? Mr. Macro Market was quite efficient in flipping back to “hawkish” when both growth and inflation were #accelerating at the same time in September.
As you can see in today’s Chart of The Day (a 2 year chart of the UST 2 year Yield):
A) When both growth and inflation are accelerating at the same time (NOV-MAR and SEP-OCT)
B) Our data driven Macro Risk Management #Process recognizes this as a “Quad 2” situation… and
C) So does the Federal Reserve, on a lag, to readily available public growth and inflation information
Cool. “So when does this end?”
I’ll generalize and say the 80/20 rule applies with our clients and followers alike in asking me that question. At least 80% of people have been focused on when it ends instead of why it has continued…
There are 2 major components I consider in attempting to answer that question:
- FUNDAMENTAL: when do GDP, Inflation, and Profit Growth slow?
- QUANTITATIVE & BEHAVIORAL: what has Mr. Macro Market priced in?
On the first component, since we are data driven, we update you on that as the data changes. On the second, I meet with Mr. Macro Market at an ungodly hour of the morning, daily. He gives me real-time price, volume, and volatility data.
Is this morning’s economic and profit data as good as it gets? For the love of God, even IBM (who hasn’t seen SALES accelerate in 5 years), is guiding to an #acceleration! So there’s a case to be made that we’re getting there.
There’s also been a good ongoing case to be made that we aren’t.
Immediate-term #overbought signals (like we’ll register at SP500 > 2562) are TRADEs, not TRENDs. So instead of trying to call market tops, all I’d do is book some gains on the long side up here…
I’d also add some gross short exposure. You can see that in Real-Time Alerts where I added HCA Healthcare (HCA) and Darden Restaurants (DRI) on the short side into yesterday’s close.
Our analysts (Tom Tobin on HCA and Howard Penney on DRI) can explain to you why they think the current prices of those stocks do not reflect all prospective fundamental information.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.28-2.39% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
Nikkei 205 (bullish)
DAX 121 (bullish)
VIX 9.18-10.67 (bearish)
YEN 111.30-113.34 (bearish)
Oil (WTI) 50.48-52.73 (bullish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
