“I know something about stealth.”
-Brigadier General Robert Spalding
There was nothing stealth about chasing “stocks” (especially HIGH BETA and/or SMALL CAP Factor Exposures) at the JUL or SEP 2019 highs. There was nothing stealth about Trump’s “Phase 1” #BeanDeal with the Chinese last week either.
Short-term Presidential tweets aside, if you’d like an insider’s long-term perspective on what the USA is really dealing with when it comes to the CCP (Chinese Communist Party), tune into @HedgeyeTV at 12PM EST today.
I’ll be having a Real Conversation with General Spalding about his recent book, Stealth War – How China Took Over While America’s Elite Slept. We’ll also have a LIVE Q&A session if you’re interested in asking questions.
Back to the Global Macro Grind…
Hedgeye Risk Management 101: always question the prevailing consensus. Don’t be contrarian for contrarian’s sake. Fade the FOMO when your A/B Testing #process says the timing is right to do so.
But, but, “stocks are up” and SPY is testing all-time highs…
Yep, they were in October of 2007 too. Been there, seen those all-time highs. That was it folks. By November of 2007 when the ROC (rate of change) of US Earnings were fully reported, “stocks” (SPY) dropped over -6% in NOV of 2007… and you know the rest of the story.
No worries. I’m not making a call that it’s October of 2007 or that we’re going to have another 2008. It’s October of 2019 and I have massive and huge conviction that we are going to have a 2020.
What happens if “Phase 1” of the “trade deal” results in more #ChinaSlowing?
As you can see in today’s Chart of The Day, the #1 reason why China continues to slow is that the Chinese have to “comp” (or lap the base effects of) the BIGGEST STIMULUS IN THE HISTORY OF CHINA (i.e. the 2016 stimulus that got Xi elected for life).
So… it’s either going to be:
A) An imminent rebound in everything China and your Global Cyclicals are raging buys vs. “Short Defensives”… or
B) Persistent #deceleration through Q1 of 2020 (which will be reported in the Spring of 2020) … with
C) An open Hedgeye question on whether the USA re-enters #Quad4 in Q2 of 2020
Part A of our A/B Test on whether China is seeing an imminent ramp is actually pretty easy to answer. We simply bean count economic data as it is reported and plug it into our trusty predictive tracking algos that called China, Europe, and EM #slowing back in Q1 of 2018.
Part B of our A/B Test is my market signaling (PRICE/VOLUME/VOLATILITY) #process:
- Shanghai Composite Index was down another -0.4% overnight (-1.7% in the last month) after failing to recapture its SEP lower-high
- Dr. Copper is down another -1.4% this morning and remains Bearish @Hedgeye TREND as it has throughout “deal progress”
- UST 10yr Yield is down -4 basis points this AM after failing at yet another lower-high post US #PeakCycle at this time last year
But, but… if
A) The VIX drops below 15 … and
B) “Stocks” breakout above their 50-day Moving Monkeys … and
C) Jamie Dimon says the consumer is in “great shape”…
Then #drink.
Kidding on the last part. It’s 6AM and way to early for that. But, seriously, what if you had serious FOMO and chased HIGH BETA “value” and global cyclicals the last time the VIX dove below 15 (i.e. in JUL and SEP)?
Moreover, what if you chased those Sector Styles and Factor Exposures and SHORTED Treasuries, Gold, REITS, Utilities, and rate sensitive US Housing stocks? You might need an AA meeting to recover from those decisions.
Our Long Housing (ITB) call (from October of last year when consensus hated Housing) made a #FullCycleInvesting NEW HIGH yesterday, btw. So if you really need or want “cyclical” exposure, that’s been a much better one than Chinese or European “recovery.”
Just to finish off on the “feelings” part of this whole FOMO thing, you can see it very clearly in futures & options markets:
A) This morning, Implied Volatility on SPY is trading at a -5% DISCOUNT to what’s been realized volatility in the last 30 days
B) Implied Volatility on SPY was trading at a +46% PREMIUM (vs. 30-day realized) early LAST WEEK!
In other words, I think you all get it. AFTER 3 straight down weeks for the SP500 (SPY), the Street was willing to buy protection, big time, and bid up PREMIUMS because the Street knows SP500 Earnings for Q3 are already down -5.4% year-over-year (to be continued).
And, AFTER a 1-week rally from immediate-term #oversold lows in SPY, some of you are forced to chase. Since I don’t have to delta-hedge directionally with the market’s latest move, I don’t chase. There’s stealth alpha in risk managing your net exposure by fading the FOMO.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.43-1.79% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 63.06-64.92 (bullish)
REITS (VNQ) 91.95-93.65 (bullish)
Shanghai Comp 2 (bearish)
VIX 13.01-21.58 (neutral)
USD 97.75-99.13 (bullish)
GBP/USD 1.20-1.28 (bullish)
Oil (WTI) 51.63-54.79 (bearish)
Gold 1 (bullish)
Copper 2.51-2.64 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
