“There were too many big price jumps to fit the bell curve.”
-Benoit Mandelbrot
Now that this raging bull in the US stock market has gone completely fractal on the bears, it’s time to bring back The Brot! Benoit Mandelbrot, that is. Unlike many linear economic and “valuation” experts, The Brot fully respected Power Laws.
The distributions of economic data, market returns, etc. don’t neatly conform to the beautiful bounds of a bell curve. Anyone who has managed money understands that. Both the price of things and their associated volatilities have a central tendency to cluster.
BREAKING: US Consumer Confidence Rips To a 204 Month High And The US Stock Market Jumps Another Full +1% To An All-Time-High. Did you see that non-fake-news highlighted anywhere in mainstream media yesterday? Of course not.
Back to the Global Macro Grind…
You don’t have to be able to model fractal dimensions to get the math behind 204 divided by 12. That equals 17. As you can see in today’s Chart of The Day, US Consumer Confidence hasn’t been this high in 17 years.
Is that too “soft” of a data point for our competition? Do we really care? Hard (for bears to accept) US economic data recently includes:
- Durable Goods = 37 month high
- Capex = 65 month high
- New Home Sales = 120 month high
- ISM Services = 147 month high
- ISM Manufacturing = 161 month high
And, fortunately, 0% of the 2017 US Growth Bears called any of these #accelerations. Most of them were expecting some kind of a “mean reversion” (lower) in ISMs, PMIs, etc. Anyone who had a portfolio set up with that “call” for the last year should be fired.
What we want you to do is get hired! That’s right. It’s a great time to explain to your clients (and prospective ones) why you absolutely crushed it this year. You aren’t a macro or valuation tourist. You are a data driven and apolitical portfolio manager!
As an overlay to the US macro-economic data, be sure to market the #acceleration in the US Profit Cycle:
- 490 of 500 SP500 companies and all 100 of the Nasdaq companies have officially reported Q317 Earnings
- Year-over-year EPS growth for the SP500 in Q317 was +7.0%
- Year-over-year EPS growth for the Nasdaq in Q317 was 21.3%
Tell them that’s why you’ve been buying every damn dip in the growthier components of the US stock market. Tech (in the SP500) has had 66 of 68 companies report aggregate year-over-year EPS growth of +23.6% in Q317.
Might these be major reasons why Tech (XLK) is +33.8% YTD?
Yep. And how about the last 3 months of Reflation (i.e. inflation #accelerating in rate of change terms from its summer time lows)? Tell them that’s why you added:
A) Oil … and
B) Financials (XLF)
To your gross long exposure… and sold rate sensitive exposures like Gold.
In the last 3 months here’s how you did with that:
- USO (United States Oil Fund) = up +21.5% in the last 3 months
- Financials (XLF) = up +9.1% in the last 3 months
- Gold Miners (GDX) = down -5.5% in the last 3 months
If you have friends who don’t run money but are in the business of driving “eyeballs” to click on negative economic data, tell them they should get into doing some European Tourism. The 2 most negative economic data points I can find in the last 2 days are:
A) Spain’s Retail Sales #Slowed to down -1.2% year-over-year in OCT
B) France’s Consumer Spending #Slowed to down -0.6% year-over year in OCT
So, I’ll look to short some Spanish (EWP) and French (EWQ) growth expectations when their ETFs tap the top-end of my @Hedgeye Risk Range. Booking gains in the USA is another way to hedge against this “inevitable market top” bears whine about.
Lessons learned about The Cycle? Next time you see the US economic and profit cycle do what it’s been doing for all of 2017, make sure to explain to your clients that there’s a big difference between the words inevitable and imminent.
Imminent will be our call when both the data and market signals support it.
That’s why we’re making the China and Southern European #Slowing calls alongside US #GrowthAccelerating. These economic realities don’t “fit” linear-probability models of “globally synchronized growth” either.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.30-2.40% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 8.53-10.98 (bearish)
USD 92.50-94.44 (neutral)
GBP/USD 1.32-1.34 (bullish)
Oil (WTI) 55.67-59.50 (bullish)
Nat Gas 2.94-3.22 (bullish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
