“Swings in emotion/psychology strongly influence the economic and corporate profits cycles.”
-Howard Marks
While that quote comes from Chapter 7 (The Pendulum of Investing Psychology) of Howard Marks’ new book, Mastering The Market Cycle (2018), it’s the same thing he’s been saying since his earliest investment memos to his clients back in 1991.
Do the swings in your emotions matter to markets? When you consider them both individually and as part of the collective consensus, of course they do. In the immediate-term, those feelings can influence your perceptions of the economic cycle too.
How many times has someone in this profession said something to you like “it feels like that’s been priced in”? Personally, I try to not feel anything at all when measuring and mapping The Cycle.
Back to the Global Macro Grind…
Trying not to “feel” is not easy for we flawed human beings. But, with a data dependent #process, we can certainly try to have the discipline required to do the opposite of what consensus and their charts are doing at critical turns in The Cycle.
One of the US stock market’s great bellwether’s for the Global GDP Cycle (FedEx) reported earnings last night:
A) Going into the print, your Moving Monkey chartists probably felt good about it (FDX was above the 50-day)
B) Post the print, with both the 50 and 200-day Moving Monkeys broken (again)… not so much
When a $50B company guides down 2x in 3 months, and all “technical” levels of Old Wall support are broken, that’s a pretty simple A/B test to not have been long of it in your portfolio.
As you can see in a 3-year chart, when you want to buy/sell a Global Cyclical like FedEx (FDX) is:
A) BUY: When the Global GDP Cycle is bottoming (i.e. Q2 of 2016) at around $120/share
B) SELL: When the Global GDP Cycle is peaking (i.e. Q1 of 2018) at around $270/share
Remember the Shanghai Accord in early 2016? FedEx (and almost every Global Cyclical) does. Combined with Janet Yellen’s Fed dropping their dot-plot like stone, that was one of the biggest Global Monetary Easings of the modern era.
If you could have bought FDX at $120 and sold it at $270, you would have. To generate that +125% return, you actually didn’t have to do any bottom-up work on the company either. You just had to get the Global GDP Cycle right using our GIP Model.
You dirty short-sellers could have shorted FDX at $270 and covered the short around $150 when they guided down on their cyclical earnings outlook the first time at the end of December 2018 too. Again, no “meetings with the company” required for 2 & 20.
Then, imagine you went long (again) at around $154, because the Fed was about to go dovish?
A) Cool, you’d have made almost +20% in the 6 week period where Powell went from hawkish to dovish TWICE
B) And you would have bought it knowing nothing other than what to do when the Fed goes Dovish Enough!
Yeah, I hear you on the #cowbell. Then what?
A) From the mid-FEB peak in the net SHORT SP500 position that hedge funds took … to
B) Wherever FDX goes next on both The Cycle and it guiding down 2x in the last 3 months …
The stock is still a certified disaster for anyone who didn’t do macro before the macro did them. And no, calling it “cheap” (using the wrong Global GDP #s and FDX EPS #s) wasn’t a catalyst for the stock either. The Fed going dovish was.
This finally brings me to The Question of your macro market day: Is the Fed going to be #DovishEnough today?
- The short-end of the Treasury Bond market says no (2yr yield is still up at 2.46%)
- The Yield Curve (10s minus 2s) says no (at +13bps wide that’s the flattest it’s been in 2019)
- Gold says probably not (Gold -0.3% in early trading – it will do better when the 2yr yield craters)
With the long-end of the curve (10yr Yield) not budging this week, Bond Proxies like our lovely-long Utilities (XLU) didn’t think the Fed was going to be Dovish Enough yesterday either. Utes were down -1.1% on the day, but the Financials (XLF) were -0.8% as well.
The Financials (XLF) do not like a flattening to inverting yield curve. So, until Powell realizes that we’re back in a US Earnings Recession (High Yield Spreads will have to blow out again to wake him up to The Cycle’s reality), how can the curve steepen?
If you’re in my ROC camp and you’re tying the FDX Earnings #Slowing story to the Fed’s hawkish/dovish story, you’re probably expecting the Fed to be Credit market and SPY dependent rather than “full employment and price stability” dependent.
Currently, both the Credit market and SPY are begging for more #cowbell (Rates Down, Dollar Down). So the best leading indicator for more of that is the Fed NOT being Dovish Enough so that markets force Powell to finally go more dovish again!
Will that and/or an alleged “trade deal” stop the Fedex’s of the world from guiding lower? For “value” buyers of FDX, not today.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.56-2.66% (bearish)
UST 2yr Yield 2.40-2.50% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 56.47-58.71 (bullish)
Shanghai Comp 2 (bullish)
VIX 12.06-17.21 (bearish)
USD 95.30-97.75 (neutral)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 56.51-60.26 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
