“Images of the future are shaped by experiences of the past.”
-Kahneman & Tversky
There’s certainly been a lot of bull out there in the marketplace this year. There’s a lot of bearish baggage and bias too. None of this should surprise anyone. We’re all human. And many humans have a very hard time admitting they are wrong.
As Kahneman & Tversky go on to explain, “we often decided that an outcome is extremely unlikely or impossible, because we are unable to imagine any chain of events that could cause it to occur. The defect, often, is in our imagination.” (The Undoing Project, pg 194)
While it’s no longer hard to imagine #accelerating GDP, Profit, and Capex Growth in the USA, it remains very difficult for “valuation” bears to explain how these major causal investment factors didn’t drive returns in 2017.
Back to the Global Macro Grind…
It’s that time of the week again. It’s Macro Monday! From a process perspective, this is the day that we get to contextualize last week’s macro moves within the lexicon of our multi-duration and multi-factor framework.
In summary, last week was a Quad 2 kind of a week (both growth and inflation factors #accelerated). On the “reflation” front, here’s what moved meaningfully:
- CRB Commodities Index (19 Commodities) reflated another +1.3% on the week back to Bullish TREND @Hedgeye
- Oil (WTI) ramped another +3.4% on the week and remains Bullish TREND @Hedgeye
- Copper was up another +0.4% last week to +23.4% YTD and remains Bullish TREND @Hedgeye
- Nickel ripped +8.8% higher on the week to +24.0% YTD and remains Bullish TREND @Hedgeye
- Live Cattle prices inflated another +5.4% on the week to +26.5% YTD and remain Bullish TREND @Hedgeye
In US Treasury Bond Yield terms, the short-end of the curve said “I’ll see your reflation and give you a DEC rate hike”, whereas the long-end of the curve said “I’ve already tapped the top-end of the @Hedgeye Risk Range and will pullback because I want to”:
A) UST 2yr yield was +3 basis points week-over-week to 1.61% = Bullish TREND @Hedgeye
B) UST 10yr yield was -8 basis points week-over-week to 2.33% = Bullish TREND @Hedgeye
C) Yield Spread (10yr minus 2yr) compressed another -10 basis points on the week to +72bps
While there aren’t many market signals left that US growth bears can cling to, a “flattening yield curve” is one of them. This likely reflects that there isn’t much upside to rate of change “reflation” beyond the OCT data that you’ll get in NOV.
As a matter of #process, for those of you looking ahead at the “comps” (comparative base effect period), you’re well aware that the DEC, JAN and FEB compares for headline inflation steepen significantly.
If/when reported “reflation” rolls over again, that should keep a cap on the upside in the UST 10yr Yield. We currently have its immediate-term @Hedgeye Risk Range at 2.31-2.48% and we don’t argue with that.
If reflation slows in Q118, we’re right back into what we call Quad 1 (real growth accelerating as inflation slows) and you know what absolutely loves Quad 1? It’s what ripped to all-time highs (again) last week:
- Nasdaq up another +0.9% last week to +25.7% YTD = Bullish TREND @Hedgeye
- Tech (XLK) up another +1.5% last week to +31.3% YTD = Bullish TREND @Hedgeye
- SP500 up another +0.3% last week to +15.6% YTD = Bullish TREND @Hedgeye
What doesn’t like Quad 1 as much? Mostly what we call “low quality” US Equity Style Factors:
- High Debt (to Enterprise Value) dropped another -1.2% last week to only +7.3% YTD
- High Short Interest fell another -1.5% last week to +0.5% YTD
- Smaller Cap was down another -1.8% last week to +0.5% YTD
*Mean performance of Top Quintile vs. Bottom Quintile for SP500 companies
Put simply, you don’t want to show your investors (or your spouse, or friends) your returns if you’re only +0.5% YTD. The “market is too expensive” stories that were available to people for the last 6-12 months were obviously biased and one-dimensional.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.31-2.48% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 32.92-36.21 (bullish)
VIX 8.91-10.67 (bearish)
USD 93.75-95.38 (bullish)
EUR/USD 1.15-1.17 (bearish)
Oil (WTI) 52.38-55.99 (bullish)
Gold 1 (bearish)
Copper 3.08-3.21 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
