“Why? Because it no longer needs its brain.”
-David Eagleman
If you think I have mental issues being long the Long Bond this week, consider being a Sea Squirt – it ate its own brain!
That’s right. “It swims around early in its life, eventually finds a place to attach (like a barnacle), and then absorbs its own brain for nutrition… as soon as it is settled in one place, it no longer needs its brain.” (pg 31)
That’s from a chapter called “To Innovate Is Human” in a book I’m finishing titled The Runaway Species. To be long growth and innovation isn’t just human – it’s cyclical. And you definitely don’t want to be long the momo, high beta, brainy stuff in Quad 4.
Back to the Global Macro Grind…
Just when I was feeling quite uncomfortable 24 hours ago, something fun happened in my p.a. – my shorts went down more than my longs. I don’t have many longs to begin with, so it was a great day to be short US Equity Momentum, High Beta, and Growth stocks.
Despite Rates Up, the Dollar was up and so were Utilities (XLU) +0.5%.
Especially when it comes to smid-cap momentum investing, by the end of August of 2018, you literally didn’t need a brain. After 9 STRAIGHT quarters of US GDP GROWTH #accelerating, the less you knew about anything other than the chart, the better.
To be fair, many of our clients know all of these growth companies cold. With an unprecedented tailwind of consecutiveness at their backs, they knew as well as market history does that being long GROWTH was where they’d get paid with the US economy in Quad 2.
But what happens when you go from Quad 2 to Quad 4? A: yesterday happened.
And it wasn’t just yesterday:
- The Russell 2000 is down -5.4% since peaking on AUG 31, 2018
- The NASDAQ is down -2.8% since peaking on AUG 29, 2018
- The Russell Growth (IWO) is down -5.5% since peaking AUG 31, 2018
With an epic US #GrowthAccelerating Q2 Earnings Season coming to an end in AUG 2018, did Mr. Market take the “high multiple” growth bears right to the screws of the back side of the woodshed? Did the market discount the acceleration right to the bloody end?
If we’re right on Quad 4 in Q4 …
AND any kind of a Tech Earnings #deceleration in Q3 Earnings Season, the market may have nailed this.
As you can see in today’s Chart of The Day (slide 64 in the Q4 Macro Themes deck), US Growth Bulls have a well-earned victory lap that will go into the market record books as one of the most epic streaks ever for US Growth Investing. Here we’re showing:
- Cumulative TTM Relative Performance for the Russell 3000 Growth over Value Index
- Cumulative TTM Relative Performance for the SP500 Info Tech vs. SP500 Value Index
The most important causal factor in that chart is the point in time in 2016 when the ROC (rate of change) for US GDP Growth bottomed. That’s precisely when bond yields (UST 10yr Yield = 1.4%) bottomed too.
Being long Low-Beta, Minimum Volatility, and Duration (long-term Treasuries) is a multi-asset class and portfolio construction right now – not a day trade on today’s expectedly #LateCycle hawkish US wage inflation report.
Obviously if you layer on big cyclical net short exposures to Chinese and Emerging Market “growth” equities, your total portfolio return has been getting better and better for the last few weeks. Unlike US Growth Shorts, those International ones have been working all year.
Not ironically, if we have more US stock market days like yesterday, Long-term Treasuries not only start going down less relative to everything with wicked high momo and beta, they start going up on an absolute basis AFTER going down for the last 3 years.
To have this portfolio pivot in place doesn’t mean you have to be calling for a US Recession. Not at all. Happy to be positioned for an Italian and Argentine one though. Don’t forget your biggest position should be in cold, hard, brainless US Cash in Quad 4 too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.99-3.23% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
Utilities (XLU) 51.20-53.60 (bullish)
VIX 11.42-14.95 (bullish)
USD 93.60-95.95 (bullish)
EUR/USD 1.14-1.16 (bearish)
Oil (WTI) 70.02-76.82 (bullish)
FB 156-166 (bearish)
GOOGL 1160-1223 (bearish)
NFLX 356-387 (neutral)
TSLA 267-308 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
