“China has a 5,000 year history of empire building.”
-Robert Spalding
Since I’m sure that’s the duration most long-term US Equity Portfolio Managers are considering when making buy/sell decisions post every China “trade deal” tweet, I’ll allow USAF Brigadier General Spalding to expand on the long-game China is playing this morning:
“The magnitude and complexity of the stealth war that the Chinese Communist Party initiated against the United States and the rest of the Western world is so great that even a close observer of today’s headlines will have difficulty grasping it… if we continue to ignore our differences with China that are at the root of the stealth war, we’ll continue to lose.” (Stealth War, pg 20)
Seriously man? Why would anyone anywhere care about things like this? Wall Street is willing to let the Fed print money to infinity and beyond and ramp the US Deficit to all-time highs. You think it cares about the long-game with China into “year-end” for stocks?
Back to the Global Macro Grind…
“So”… are you up +23.1% YTD? “Stock market up big today. A new record. Enjoy!” -Donald J. Trump
With the SP500 +0.3% yesterday and the beloved “Consumer is in great shape” stocks (Consumer Discretionary, XLY) down -0.4% on the day, I’m not sure that’s as “big” as he was expecting into the US market close, but damn the details!
The fact of the matter is that the SP500’s closing price of 3085 was an all-time closing high and officially the bestest bigliest price any long or short term investor could have ever booked some gains on.
But can Long Only PM’s book gains on this kind of strength into compensation’s year-end? Or do they have to chase? If they’re not up +23.1% “YTD”, many of them have to do whatever they can to try to be.
Would they do that with their own money?
I was meeting with a high profile Long Only Energy PM yesterday (yes a few of them are still alive). He had the humility to show me his fund’s returns over the course of the last 3 years:
- In 2016 he was +111.6%
- In 2017 he was -20.9%
- In 2018 he was -25.5%
If you were invested in his strategy the last time we went bullish on Energy Stocks (2016), would you have booked the 2016 “year-end” gain? If you are up +23.1% or more right now “YTD” (many of our clients are), should you book some of those gains?
I’m long both Energy (XLE) and #InflationAccelerating Asset Allocations right now. I’m not selling any of those.
But if I was choke full of SPYs (I’m not), Software Stocks (thankfully I’m not), and Consumer Discretionary (XLY) I would sell on every up day at the top-end of my @Hedegeye Risk Ranges into year-end.
On that developing Bearish @Hedgeye #Divergence between SPY and the beloved Consumer and Software stocks, yesterday’s underperformance in Consumer Discretionary (XLY) wasn’t new. It started when both XLY and Software (IGV) peaked in July.
What also happened back in June/July?
A) The Yield Curve “steepened” to a long-term lower-high of +32 basis points on 10s/2s and…
B) US Consumer Discretionary Earnings went NEGATIVE year-over-year for the 1st time since the last Cycle peaked
Amidst all of the consensus talk about earnings being “better than expected” (in some Sectors like Utilities which have aggregate year-over-year EPS growth of +9.9% here in Q3, they’re way better than expected!)…
Consumer Discretionary earnings are DOWN for the 2nd quarter in a row and worse than any Consumer bull expected 6-12 months ago. But no worries, the Old Wall Consensus estimate for Consumer Discretionary Earnings Growth is +10-14% for the first half of 2020…
If you actually want to (or have friends in the business who have to) believe that a China trade deal or an act of my good God is going to provide for that ROC (rate of change) #acceleration in earnings growth, have at it. I’ll happily keep selling these lower-highs all the while.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.67-1.94% (bearish)
SPX 3020-3099 (bullish)
RUT 1 (bearish)
Energy (XLE) 57.31-62.16 (bullish)
Shanghai Comp 2 (bearish)
DAX 126 (bullish)
VIX 12.12-15.45 (bearish)
USD 96.80-98.28 (neutral)
Oil (WTI) 54.16-57.96 (bullish)
Nat Gas 2.42-2.94 (bullish)
Gold 1 (bullish)
Copper 2.63-2.72 (bearish)
AMZN 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
