“We must prove it again. We compete, as always, against ourselves.
-Ken Dryden
Happy Holidays to all of you reading the Early Look this morning. I very much appreciate you taking the time. To all of you who celebrate Christmas, I hope yours was as magical as it was for my growing family. Our four children loved it!
With the holidays at the McCullough household comes lots of hockey. And I mean lots and lots of hockey! Hockey is much more than a game about a score. The score, of course, matters. But for me it’s really a game about life.
I bring those life lessons into my profession as a macro market strategist. We had a good year @Hedgeye but that’s ending now. In the eyes of The Game, we’re only as good as our last big call. We’re cool with that. We must prove it again and again and again.
Back to the Global Macro Grind…
Our pending Q1 of 2018 call on Reflation’s Rollover Part Deux is, of course, data dependent. Unlike some of those we compete with on the Old Wall, our “calls” on both growth and inflation aren’t born out of “theories.”
Our macro calls aren’t about what we’d like the data and markets to do – they are about what the data and markets are doing.
In terms of the “hard” (for bears to accept) data, last week’s was nothing short of fantastic:
- US Durable Goods Growth was +8.2% year-over-year in NOV
- US Durable Goods Ex-Defense & Aircraft was +6.4% year-over-year in NOV
- US Capex was +8.1% year-over-year in NOV
To put those economic data points, in context, those are all in the area code of 64-65 month highs. Combining those with another solid US Consumption report for NOV (+2.7% year-over-year) our predictive tracking algo for US GDP ticked higher again to:
A) +2.68% year-over-year for Q4 of 2017
B) +3.24% q/q SAAR for Q4 of 2017
With the Bloomberg GDP consensus forecast at +2.66% q/q SAAR for Q4, that not only keeps the Hedgeye forecast where it’s been for all of 2017 (higher than consensus and back-end loaded to 2H 2017), but implies the 3rd straight quarterly +3% handle for US GDP.
Boomyah!
Whether you had a great year or a bad one, you can look back on what was plainly obvious to anyone with a data dependent macro research #process and learn something from it. Learn from what works and what doesn’t. Evolve constantly. That is The Game.
To be repeatedly successful in The Game, you need to sometimes change your positioning slowly and sometimes all at once. On yesterday’s ramp in Oil prices to higher-highs (vs. the NOV highs), I had to change my positioning on reflation.
This may not make everyone happy (especially if they bought REITS alongside me via VNQ on last week’s #oversold lows), but my job isn’t to make everyone happy. It’s to be more right more of the time than I’m wrong. A big part of that is timing.
Since the relative bottoming process on REITS (VNQ) will be a function of how Reflation trades, I will remain data and market dependent on this idea. Especially when they are still signaling Bearish TREND, all “new” long ideas need to be risk managed.
With Oil Up, in Real-Time Alerts I sold my trading LONG idea in Long-term US Treasuries (TLT) yesterday too. Why?
A) Oil making higher-highs within a Bullish @Hedgeye TREND is bullish
B) UST 2yr Yield pushing to higher-highs alongside Oil’s reflation keeps 2yr Yields Bullish TREND too
C) UST 10yr Yield pulling back to 2.46% within a @Hedgeye Risk Range of 2.34-2.54% = TLT selling opportunity
You see, one of the main reasons why bond proxies like REITS and Utilities (XLU) were not good places to be on a relative basis to US Growth Exposures in 2017 is quite simply because bond yields look like growth and inflation do when they are #accelerating.
To make a super-bullish case for Long-term Treasury Bonds, REITS, Utes, Consumer Staples, etc. (been there, done that) I’ll need to see both growth and inflation slowing at the same time. We call that Quad4.
If market history is any guide, to stop making a bearish case on bond proxies, Reflation’s Rollover should do. But, again, that remains a data and market dependent view – one that I am happy to read and react to at the top of every 2018 risk management morning.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.34-2.54% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 35.34-38.15 (bullish)
RMZ 1130-1187 (neutral)
VIX 9.12-10.69 (bearish)
USD 92.50-93.75 (neutral)
Oil (WTI) 56.00-59.99 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
