“Deck the tree with false blossoms.”
-The Thirty-Six Stratagems
I’d bet a lot of money that a lot of people who are “long stocks” on a US/China “trade deal” do not know what the Thirty-Six Strategems are. That’s a problem. If those people think that Xi thinks like Trump thinks, that’s an even bigger problem.
Other than “year-end” compensation benchmark indices, what are you chasing right now? Do we have a “deal” that will stop China’s secular slow-down? What is Xi going to do post the US Senate passing the Hong Kong Democracy Bill?
Dr. Michael Pilsbury’s perspective on Chinese strategy is an important one to consider: “China’s Marathon strategy depends heavily on goodwill from other countries, especially the United States…
That goodwill translates into massive foreign investment, the acceptance of Chinese exports, indulgences when the government or state-affiliated organizations are caught stealing technology or violating WTO rules…
And… looking the other way on human rights abuses.” -The Hundred-Year Marathon, pg 115
Back to the Global Macro Grind…
Enough about “long-term” investing and what you’d be doing with your own money today. That’s definitely not how The Machine is thinking about perpetuating short-term US equity market behavior into year-end.
What’s been most interesting about that is that the US Equity bench (SPY) has been diverging, big time, from virtually every other major macro market signal since “trade progress” was being parroted by the politically biased.
Chinese stocks (Shanghai Comp) were down -2.5% last week and were down another -0.8% overnight. The KOSPI (-1.3% overnight) and Hang Seng (which continues to crash) both failed @Hedgeye TREND resistance in November as well.
What could possibly go wrong for people chasing US “stocks”?
While it’s hard to believe I have to remind people about the crashes and draw-downs we’ve seen in both US and Global Equities going back to when the “Globally Synchronized Recovery” peaked in Q1 of 2018, you’d believe it if you were in client meetings we’ve had as of late.
Quadzilla, or DDDD (Data Dependent Darius Dale), and I spent all of yesterday meeting with Institutional Investors in Connecticut and it was amazing to see the developing divergences of views on Global Macro market risk and, most importantly, how to time them:
A) Long/Short Equity Managers with a stock picking bias absolutely LOVE their “secular growers” again
B) Credit Investors are petrified about chasing these developing “tights” in credit spreads into year end
C) Almost no one is long (or wants to be) either Commodities or Energy
As many of you know, I quite love the Wall Street meme of “secular growers.” The love that equity managers (and Retail Investors, since that’s all they “know” and own) have for those stocks is finally becoming cyclical.
Almost 100% of people I meet with love Amazon (AMZN)… so I tend to pick on that one in particular… as that stock pick is down -13.3% since we started making the US Consumption Cycle #Slowing call back in July.
But, but, the “consumer is in great shape”…
That statement means absolutely nothing to ROC (rate of change) process people. US Retail Sales have #slowed from +6.5% at The Cycle peak in Q3 of 2018 to +3.1% year-over-year as of last Friday’s OCT report.
And The Curve compressed, big time, on that cold, hard (read: non-ISM hope), economic data.
The Curve? Bro, I only want to send you emails about it when it is “steepening.” Yeah, well since US Industrial Production was reported alongside that US Consumer #slowing reality, the Yield Spread between the UST 10yr and 2yr Yield has been pancaked to +16bps wide.
Bps are basis points. And there are no basis points separating the 5yr UST and 2yr yield this morning.
Moreover, what petrifies most Credit Investors at this stage of The Cycle is that they know that if A) the curve moves back towards inversion and B) High Yield Spreads start to widen again… then C) credit can be a hot mess at the turn of the calendar year.
In today’s Chart of The Day, Darius will show you what’s NEVER happened before in corporate credit (divergence b/t C’s and B’s).
Never, of course, remains a very very long time, so we suggest that instead of chasing and hoping, you review what happens 100% of the time when profits go negative on a year-over-year basis for multiple consecutive quarters.
If you’re thinking Q3/Q4 is the “bottom” for negative profit growth (the ROC of cash flow is the leading indicator for credit quality), then you’re probably thinking the China #BeanDeal is all good and last week’s US consumption #slowing data was fake news.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.71-1.92% (bearish)
UST 2yr Yield 1.52-1.67% (bearish)
SPX 3059-3130 (bullish)
RUT 1 (bearish)
REITS (VNQ) 90.20-93.85 (bullish)
Energy (XLE) 58.01-61.35 (bullish)
Shanghai Comp 2 (bearish)
VIX 11.92-14.86 (bearish)
USD 97.30-98.46 (bullish)
Oil (WTI) 54.68-58.23 (bullish)
Nat Gas 2.44-2.89 (bullish)
Gold 1 (bullish)
AMZN 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
