That #Quad4 hurricane we started warning subscribers about in September? It’s hammering stocks.
- S&P 500 (-8%)
- Nasdaq (-10%)
- Russell 2000 (-14%)
(Performance above is year-to-date, peak to present… inclusive of today’s bounce!)
We opened up a free edition of The Macro Show today hosted by Hedgeye CEO Keith McCullough to help guide investors through the #Quad4 hurricane.
Below is the replay, plus a critical excerpt transcribed from this edition of The Macro Show.
Keith McCullough: I'm going to go through the top three things in my macro notebook this morning. Let's do it.
First, we’re getting oversold signals in equities globally. Now, we define a crash as a greater than 20 percent move. What you'll find in Asian equities is that you have a lot of these. The Kospi is the latest to join the crash after dropping -1.6% overnight. It’s now down -21% from its year-to-date highs. That’s just impaling people that have been buying every damn dip. Guess what? Those weren't dips.
Chinese stocks obviously have had a moderate bounce. Still, the Hang Seng is down -24.6% from the highs in January. If you didn't know that the globally synchronized recovery has turned into globally synchronized slowing, now you know.
I mean ECB President Mario Draghi is speaking this morning and taking down the ECB’s forecasts. If you watched that, apologies for how boring that was. It's like watching paint dry. I don’t particularly care about economists reacting to economic data on a lag.
All that's happened in markets recently is not new news this morning. You didn’t have to watch a CNBC special last night to wake you up. All these risks should have been managed globally 10 months ago. Back then, we made the call on China slowing, Emerging Markets slowing and Europe slowing. That's 10 months old. That’s not new news.
Still, you’ve got to be careful. You’ll learn a lot from this bounce. But it was really important as a short seller or risk manager to cover some shorts on oversold signals so that you can be more aggressive shorting them on the bounce.
Again, the top end of the Risk Range is almost 4% higher for the S&P 500 with the low end of the range, only 1% lower. So there's more upside today relative to the downside.
Something awesome happened yesterday. Whether you were long Consumer Staples (XLP), the U.S. Dollar (UUP) or Utilities (XLU) recently, they were all up on the day. Not like Semiconductor (SMH) stocks – which is one of our favorite shorts – that was down -6.7% on the day. The Nasdaq was obviously down more than -4%. The Russell 2000 is down like -15.6% going back to where it peaked in late August. If you bought it up there, you'd have to be up 19% from yesterday's close in the Russell just to get your money back to breakeven.
What we would rather you be doing is buying the damn dips in bonds and bond proxies. There's a catalyst for that. And that's point number three this morning, the GDP number tomorrow.
For all the macro tourists, there will be a grand, a grand party tomorrow morning because you're going to get a damn good GDP number. We have an accurate forecast for GDP that called all of the upside surprises in GDP for the last five quarters. Don't forget that GDP has accelerated for nine quarters in a row. That is a record, with the last five of them being the most impressive. We call it #Quad2, when growth and inflation accelerate. #Quad2 is where interest rates go up. That’s why the Financials (XLF), Technology (XLK), and Consumer Discretionary (XLY) stocks were going up.
We say the GDP acceleration ended in Q3. But, it's October. We're in Q4.
Getting back to GDP, we’ll have Q3 data points tomorrow. So what you're going to get is reminiscent of what Hedgeye liked on the long side previously – Technology (XLK) and Consumer Discretionary (XLY) stocks.
If we get a big number on GDP, don't worry about that. That's going to be very newsy. Macro tourists are going to jump on it. Maybe that drives markets up. And then they could reverse again. That's typical of a bear market when it's developing. If you don't know what a bear market looks like. Look at China, Emerging Markets, Europe and now the Russell 2000. The Nasdaq looks like it's pretty close to entering one.
But again, you've got to study the bounce, measure and map the catalyst.
We continue to reiterate our call for #Quad4 in Q4. In #Quad4 (i.e. Growth and inflation slowing), the best short that you could have in your portfolio is momentum followed by high beta, followed by tech stocks and the Russell 2000. If you look at what you should have on the long side, it’s low Beta stocks, Dividend Yielders, Healthcare stocks and Consumer Staples stocks. If that's what you've done this month, you have absolutely crushed it.
If you look at the month to date sector performance, you can see technologies down -10.8% for the month versus something like Utilities up +4.9% if you ran a hedge fund and that was your only position, you can get paid 5 and 50 for that.
That's about as good as it can get in the Hedgeye process. If you think that I'm going to make that call every month, you're crazier than I am. But I'd suggest you get the understanding of what helped us make that call. So again, it's the rate of change in growth and inflation. Those are the two most important factors that nobody talks about on Old Wall TV. We have growth and inflation decelerating in rate of change terms.
In #Quad4, both growth and inflation are rolling off their cycle peaks.
Don’t believe me? Let’s look at Cap Ex. So this was the peak in Cap Ex, 9.8%. See that black? This is called a massive acceleration in Cap Ex. So this is the September number. We're talking about the Q3 2018 number. You know what the number was? 1.9%. That is the worst number I've seen in a long time relative to expectations. Here’s the main point the comparison next quarter gets much tougher. The monthly comparisons get tougher.
Cap Ex is going to look slower and slower and slower throughout the fourth quarter. What's that going to look like? 3M’s (MMM) guidance cap, Caterpillar (CAT), any of these industrials that are imploding on themselves right now. If you’ve been surprised that they've guided down so far, wait until they guide down for real.
If you audited my personal account, you would see that the number one position in terms of size is Short-Term Treasury bonds (SHY). That's the number one position in terms of capital. That’s followed by number two, Utilities (XLU), and followed by number three Long-Term Treasury bonds (TLT). Market history agrees with these positions. They are classic #Quad4 exposures based on our back-test data.
Please, do not ignore Mr. Market.
