“Sell Hubris, Buy Humiliation”

Bank of America Merrill Lynch strategist Michael Hartnett says there is a tactical (short-term) trade opportunity afoot as the world comes to the realization that US growth rates will not remain isolated from the global slowdown everyone else is coping with. There is a massive unwind happening now in US equities, FANG stocks and the US dollar as the weakness that began in US manufacturing data spreads to the service sector and the “strength of the US consumer” is re-rated lower.

As this process of bludgeoning crowded trades continues and the dollar is held back, it opens up opportunity in some of the hardest hit areas of the spectrum, from commodities to emerging markets.

Their trade idea is to “Sell Hubris, Buy Humiliation”…

End of higher US growth/rates/$ trade.
Hence the 2016 capitulation in positioning for higher US growth, higher US rates and higher US dollar; our FMS has shown investors positioned for a rising US dollar and stronger US growth and one-by-one those positions are unwinding (peripheral Euro-area debt, Euro-area banks, NKY stocks, and finally, the US dollar & the FANG stocks, which have outperformed BRIC stocks by 840bps since peaking last week).

EM humiliation.
Certainly there is terrific “humiliation” to buy in EM; see macro meltdown (China exports, Korea exports, HK retail sales, Brazil IP; note HK retail sales currently down 8.5% YoY) and the fact that the combined market cap of Google and Amazon is now equal to the combined free-float market caps of all companies in the MSCI China and India indices.

Josh here – What’s interesting is that long-term investors are already engaging in this trade, by rebalancing a portfolio of global equities systematically. EM stocks – thought to be highly susceptible to a strong dollar / weak commodities – have been falling relative to US stocks for years now. At a certain point, they’ll be poised to outperform on a strategic basis, not just for a tactical trade. It’ll start when things look the very darkest and it won’t become a popular position until long after it’s been immensely successful.

A diversified strategic portfolio is at all times selling hubris and buying humiliation. It’s not fun while you’re doing it, but it looks great at cycle’s end, when everyone else seems to have been doing the opposite.


Fed, Dollar & the End of Splendid Isolation
Bank of America Merrill Lynch – February 3rd 2016

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