The Cat Came Back

The poster child of global cyclical growth is soaring today. Caterpillar, a well run company whose only fault is its' susceptibility to the capital spending of commodity producers, is trading at an all-time high. Having been written off for dead after the end of the last China powered commodities boom, the rally is surprising many. This earnings-led move is quite telling, as one key business line, energy, is lagging badly. The postponement of capital spending has created a gap in productive capacity within the global economy and now the catch-up has begun.

But we have seen many key indicators pointing towards this moment for some months now. The Kospi, the Dax, the EEM and the Copper/Gold ratio have all confirmed what Wall Street is just now just waking up to.

FANG is on the back burner, with AAPL most notably out of steam. AMZN and FB too have detrended noticeably. These popular stocks are now serving as a source of cash for the cyclical rotation that is now in full swing. Banks are breaking out and the Semis are soaring. The opportunity for alpha has rarely been higher as correlations are dropping and active management is regaining the upper hand on passive indexing.

This having occurring without a major correction to signal the rotation is a rare occurrence. I have to think that the bond market is to blame. With a backdrop of benign inflation and insatiable demand from foreign yield-starved investors, the intermarket signal that we normally see is largely absent. The TINA effect continues to confound the normal playbook.

We have rarely seen the FED remain so easy for so long into an economic cycle. I can easily see a situation arising that involves a sharp sell-off in bonds as the cries of 'behind the curve' from the long suffering bond vigilantes becomes louder. The leadership issue with the central bank is keeping the dovish forces in charge. We can now throw fiscal largesse through deficit spending and tax cuts into the mix. Should this produce a sentiment rush for stocks, look for stock and bond prices to become more negatively correlated.

The final countdown to a future bear market has now begun. Enjoy the ride but pack a parachute.