“Stacking the logs in the fireplace for the next bonfire…”
-Howard Marks
Per Howard Marks in Mastering The Market Cycle, that’s what the guys and gals at Oaktree say about The Cycle when Credit Markets heat up. As company cash flows go negative year-over-year, credit risk rises. It’s simple, really.
What’s not been simple is following Macro Tourist Narratives that every stock market up and down day is all about Trump, Trade Wars, and Tariffs. You’re going to buy or sell something this morning on a Mexican trade deal headline, really?
If you go back to when the US economic and profit cycle peaked (Q3 of 2018), you’ll see that the biggest draw-downs in both US Equity and Credit came when the economic data slowed fastest, in rate of change terms. So I’ll stay with that.
Back to the Global Macro Grind…
It really is no wonder that the Old Wall and it’s media reaches for short-cuts and simplifications of Global Macro market risk. If you don’t have a measuring and mapping #process that is apolitical and data-driven, what else would you do?
Don’t get mad about it, bros. Keep taking advantage of both the crowd and their episodic periods of complacency.
While it wasn’t really Day 3 of a Counter @Hedgeye TREND rally in “stocks” yesterday (because the Russell 2000, a broad measure of a lot of “stocks” was down -0.2% and is currently down -13.6% from where The Cycle peaked in Q318)…
Let’s just call it Day 3 of The New Hope anyway…
While hope is not a risk management #process, the new hope is that… because GROWTH & INFLATION (and PROFITS) are all #slowing at the same time now… The Fed will cut, cut, cut, and save us.
That’s both a summer-time cool and an ultra-complacent expectation, officially, as of this morning:
- IVOL (implied volatility) on SPY is priced at a -10% DISCOUNT to what’s been realized in the last 30 days
- IVOL (implied volatility) on XLK is priced at a -12% DISCOUNT to what’s been realized in the last 30 days
- IVOL (implied volatility) on XLB is priced at a -15% DISCOUNT to what’s been realized in the last 30 days
If you sold HIGH BETA every time the VIX tested 15 during the Quad 4 Scare in May, you made money. So I’ll short both Tech (XLK) and Materials (XLB) this morning as both Global and Local economic data continues to #slow, materially!
A) German Industrials Production #slowed to -1.9% year-over-year in April
B) Dutch Manufacturing #slowed to -1.2% year-over-year in April
C) US headline GDP is tracking at +1.60% q/q SAAR in the @Hedgeye nowcast
Now the perma “Fed is dovish, buy stocks” bull might love how fast the economic data is #slowing in Q2, but I haven’t seen many “stocks” go up on misses and guide-downs as of late. “So”… again, hope…
Since I think we were the 1st firm to:
A) Go from bullish to bearish on US Growth in late SEP 2018… and
B) Bet on rates dropping as opposed to rising… and
C) Forecast a RATE cuts in 2019 as opposed to hikes…
Pardon the intended pun, but bear with me for a few more minutes here. The Fed cutting rates isn’t a layup go-zone for the US economy to magically re-accelerate from a 10yr CYCLE PEAK and “stocks” to make all-time highs.
Currently, our favorite US Equity Sector Style (Utilities, XLU) is making all-time highs… but that doesn’t corroborate the view to buy the NASDAQ and Russell (IWN) here into negative year-over-year PROFITS (like the USA had in 2H of 2001).
We've analyzed interest rate cycles to see how effective the “first cut” was in resuscitating risk markets and ultimately the economy. There have been 11 rate cutting cycles since the onset of the Great Moderation (which DD extended to 1980).
The Fed was successful (i.e. SPX up 6-12 months after the first cut; soft landing achieved) in five instances:
- Early-1980
- Late-1984
- Mid-1989
- Mid-1995
- Late-1998
The Fed was unsuccessful (i.e. SPX down 6-12 months after the first cut; hard landing outcome) in six instances:
- Early-1981
- Mid-1981
- Early-1982
- Mid-1990
- Early-2001
- Late-2007
In other words if you’re just looking at this from a frequentist’s perspective, The New Hope is a coin toss (at best). If you’re looking at it like a good Bayesian boy and you overlay a conditional factor (like y/y PROFITS):
A) When year-over-year PROFIT growth is about to enter a #recession (2 quarters of negative in a row)…
B) Both “stocks” and levered Credit investments go down, hard
Unlike most people you’re reading notes from this morning, I wasn’t on the wrong side of either the 2001 or late 2007 US Growth and Profit #slowdowns. My risk is that my #process is wrong this time. I get that. That’s always my risk.
Consensus’ risk is that they’re wrong again, for the right reasons. That was the case in May of 2001, 2008, and I think (again) in May of 2019. That’s why I’ve sold all but 2 LONGS in Real-Time Alerts as of yesterday’s close.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.01-2.31% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 58.40-60.87 (bullish)
REITS (VNQ) 85.99-89.13 (bullish)
Financials (XLF) 25.38-27.39 (bearish)
DAX 112 (bearish)
VIX 15.01-20.38 (bullish)
EUR/USD 1.11-1.13 (bearish)
Oil (WTI) 49.58-56.30 (bearish)
Gold 1 (bullish)
Copper 2.60-2.71 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
