Did You Sell Yesterday?

“It’s a classic balance of exploration and exploitation.”
-David Eagleman

If you think risk managing Quad 4 in Q4 stock market rallies to lower-highs is tough, try being a honeybee. They don’t know who Trump is or what happened at dinner with the Chinese. They don’t know what the “deal” is either! 

“Each year, the population of a honeybee hive splits in two. One half stays where it is while the other goes in search of flower-filled fields that could provide a new home… before the local fields dry up, some bees head out to find richer ground. Because they don’t know where richer fields lie, they deploy an advanced team of scouts. Similarly, humans have the capacity to generate options at different distances from current standards.” –The Runaway Species, pg 163 

While yesterday was the 3^rd best Selling Opportunity in Momentum, High Beta, and Growth since September, you didn’t have to do much on the long-side of your Asset Allocation. Long Treasury Bonds is a flower-filled field and a new home for hard earned capital. 

Back to the Global Macro Grind… 

Did you sell yesterday? What did you sell? I certainly hope you weren’t shorting the Long Bond alongside consensus. That field has been drying up for 5 weeks in a row now.

With the UST 10yr Yield selling off to 2.95% this morning, the Yield Curve has compressed to YTD lows. Some parts of the curve are inverted this morning. The critical 10s/2s Yield Spread (10yr Yield minus 2yr) has compressed to +13 basis points wide. 

Omg. Omg. Is it going to be a recession? No, not yet. It’s going to be Quad 4 in both Q4 and Q1 though, so your Asset Allocation, Sector, and Factor Exposures shouldn’t change one bit. You’re already in the field that has the alpha. 

Why did I sell yesterday? 

1. US Equity Beta (SPX) was at the top of the @Hedgeye Risk Range
2. IVOL (implied volatility vs. 30-day realized) for the SP500 got smoked to a -36% DISCOUNT
3. The Cycle’s economic data is still in Quad 4 (our headline GDP nowcast for Q418 = 1.37%) 

Why didn’t I panic like the bulls did? 

1. Same reasons why I didn’t on NOV 7^th with the SPX at 2813 (top-end of the @Hedgeye Risk Range)
2. On NOV 7^th, IVOL was at a similarly complacent (bulls) and capitulatory (bears) -37% DISCOUNT
3. I don’t think The Cycle data cares (like consensus does) about Trump, Trade Wars, and/or Tariffs 

The Cycle is the cycle … because it cycles. It’s almost mathematically impossible for: 

1. China to cycle the biggest monetary stimulus in the history of China (2016-2017)
2. Europe to cycle a 6 year cyclical economic expansion (stimulated at the end by the Chinese and the US)
3. USA to cycle an epic economic response to Tax Reform in Q4 of 2017 

Ok. But what about yesterday’s ISM and PMI reports? 

1. European PMIs in Germany, France, and Italy all #slowed (again) in NOV (with Italy and France looking recessionary)
2. USA’s ISM acceleration was a monthly one, not a trending one (59.3 NOV vs. the 61.3 #PeakCycle print in AUG)
3. USA’s ISM Prices Paid decelerated to 60.7 NOV vs. #PeakCycle of 79.5 in MAY of 2018 

Cyclical companies that are losing their pricing power will lose their #PeakCycle Q2/Q3 2018 margins, don’t forget. “So”… if you’re buying stocks because the SPX “multiple is cheap”, you’re using the wrong E in your 2019 P/E anyway. 

If you want to be long that option (i.e. #InflationSlowing), you buy the Long Bond (TLT). 

Yes, you’ll have to buck up and pay more for a 2 or a 10yr US Treasury than where you could have loaded up on them throughout OCT and NOV, but that’s life as a honeybee, baby. Move on. There’s always a new bull market developing somewhere. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.94-3.08% (bearish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 53.82-56.50 (bullish)
Consumer Staples (XLP) 54.20-56.77 (bullish)
REITS (VNQ) 79.80-82.85 (bullish)
Industrials (XLI) 68.20-73.95 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 210 (bearish)
DAX 11101-11495 (bearish)
VIX 15.56-23.92 (bullish)
USD 96.00-97.50 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 49.07-54.97 (bearish)
Gold 1211-1244 (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer