Bad to the Home

George Thorogood said it best. Yesterday was b-b-b-bad!

The U.S. National Association of Home Builders reported its survey of expectations for the next six months and it was sharply lower. It would seem that Home Builders, those folks most closely aligned with consumer confidence, are losing their nerve about 2019. The market took it badly. The S&P ended the day at the lows. But what stocks took most of the drubbing? Not housing stocks. It was FAANGS that were indiscriminately dumped. Growth mania has collapsed in a chorus of recrimination about privacy issues and slowing sales.

Interestingly, in prior cycles, this peak came well before the onset of a recession (shaded areas on the graph). But that seems cold comfort as we continue to re-rate equity prices lower.

The ingredients for a capitulation bottom are quickly being assembled and it's now time to slowly get out the blue tickets. The 'Growth is Good' narrative and the endless dominance of the Tech sector has now evaporated. Apple has lowered its estimates, Nvidia has been routed, FB's is in a full blown crisis of confidence.

And as for the ultimate technophile investment, Bitcoin, the latest drop has shaken even the most ardent bulls. The fiat currency 'revenge of the nerds' scenario has now backfired on the crypto crowd bigtime.

This is music to my ears, as I was never a fan of the unicorn filled world of Silicon Valley hype. Growth investors have taken over a disproportionate amount of financial media shelf space in recent times. They began to believe their own bullshit so much that they abolished the business cycle from their thinking. Last week's revelation on iPhone's peaking unit sales says otherwise. The mark-to-market losses in tech-heavy private equity portfolios should be enormous this year. Yet another highly touted low-vol strategy bites the dust.

So where is the good news in all this? The market is giving off clues galore. Relative performance in a correction is giving hints as to the leadership of the next phase of the bull market. Quality Growth, like Health Care and Staples are a beacon of stability. Financials, Emerging markets and Commodities are hanging in like champs. And bonds have actually rallied in advance of a seemingly unstoppable December rate hike.

But the bad news on housing continues, as today's Housing Start number showed only a weak bump from September's hurricane induced collapse.

What about the housing related commodity markets? Lumber actually rallied and copper has held up well since the dollar induced sell-off bottom of six weeks ago. The King Dollar pressure on hard assets is slowly being removed, following dovishly interpreted FED remarks last week. But real upside for deep cyclical assets will only come from a resumption of global growth.

Unfortunately that prospect remains in doubt given the twin threats of Eurozone morbidity and China deceleration. So it remains up to the market to muddle through. Now that earnings season is virtually over, the only two things on my macro calendar are the G20 and the December Powell presser and, like most things in this Trump era, they are HUUGE.

Handicapping the China-U.S. trade truce became more difficult last week as the good cop/bad cop approach from Kudlow and Mike Pence played out. The vitriolic Veep sounded a lot like Spiro Agnew ( millennials - go to the wiki), playing the role of Presidential attack dog at the APEC meetings. The hoped-for China trade detente scenario that was floated mid last week by Kudlow was drowned out by the Xi/Pence's verbal rumble in the jungle down in Papua New Guinea. Didn't I say just last week that hope was not a strategy?

As for the FED, could a similar dashed-hope scenario be awaiting the bulls? The interpretation of FED-speak has always been more art than science. The market has run ahead of the plot a bit here as Fed Vice-Chair Richard Clarida's innocuous comments in the pace of global growth has been translated into a removal of one of the expected hikes for 2019. Talk about jumping the gun?

Today's declining markets are being driven by a narrative of FED overshoot. This stems mostly from the stunned perma-bull crowd, led by Jim Cramer and his MAGA acolytes. The argument that you can have your cake (strong economy) and eat it too (low rates forever) was at the core of the 2018 "Hubris Rally" in U.S. markets.

I argue that we will need to see the whites of the eyes of weaker data before Powell can get off the brakes. We are seeing some of that now. Yesterday's NAHB release provided a telling look at the effect of a 200 basis points in 30 year mortgage rates. The drop in oil prices, and now more importantly gasoline prices, are accelerating, pointing to future lowered inflation expectations.

Wages are rising at their fastest rate since the '08 financial collapse. The FED has been hypersensitive to that part of the equation, expecting a Phillips Curve style pass-through to prices. That's not happening in today's hyper competitive retail world of e-commerce. With the earnings release of Retailers, the common theme of lowered gross margins from wage cost increases was prevalent in company comments. This brewing cost squeeze theme has further exacerbated the "peak profit" narrative from market analysts. This needs to stabilize first before the stock prices bottom out.

This is ultimately a good news story for the FED to get off the brakes, but we need more.

As I sit here watching the carnage, I'm getting more bullish by the day. I can't time the bottom exactly but I'm sure as hell not putting on any shorts here. We are getting oversold now that the crowd favourites are being purged. The peak-to-trough Nasdaq correction hit 15% this morning. More importantly, the VIX 'fear gauge' is still below its October peak, effectively creating a classic divergent non-confirmation typical of bottom patterns, if it holds below 25. The mother of all Tuesday at 11 rallies is setting up nicely here.

But prudence dictates that we should hold some dry powder in case of further downside probes prompted by negative headlines. Positive headlines still seem pretty far away. I'm actually hoping for more b-b-b-bad!

Risk Model : 2/5 - Risk Off

Not much to go on here, with a falling RSI on the XIU's going negative, only to be replaced with the up-move in Copper/Gold. The latter indicator is critical to the resumption of the bull market. Without a positive reaction from Dr. Copper, all bets are off. If we can get more bad news in the next few weeks (a Xi - Trump hissy fit at G20 would be perfect!) and Powell uses the December hike to message a pause, we are off to the races.