“The key phase comes in jumping to a new S-Curve.”
- Aidan McCullen
I always start new Institutional Client meetings with my #process presentation. Since creating Hedgeye in 2008 (it was actually called Research Edge back then) I’ve always started explaining the process with the ROC (rate of change) and a Sine Curve.
Not to be confused with the longer-term S-Curve, which McCullen described in Undisruptable as a “mental model or heuristic to plot a large variety of phenomena: technology, business models, and careers, for example” (pg 36)…
Front-running wherever an economy or company is going to be on their ROC Sine Curve in the next 3-6 months (1 or 2 quarters) is about as critical to generating Full Investing Cycle Returns (and alpha) as it gets.
Back to the Global Macro Grind…
So what happens when an economy or a company (or a career) jumps to a new S-Curve? If that’s long-term (3 years or more), we call that secular. In the short-term (3-6 months) we call that cyclical.
What I loved about McCullen’s book and decision-making framework is that it focuses on both the short and long-term and doesn’t make apologies for embracing the ongoing uncertainty in doing so.
“Jumping to a new S-Curve presents a plethora of challenges… the emergent idea often looks far different than the final product”, he says. Over the long-term (14 years) that’s been my experience building Hedgeye alongside my teammates.
In the shorter-term, it’s also what we experience as we undergo Phase Transitions in markets.
Has it been a challenge to pivot your Asset Allocations, Sector Weights, and Factor Exposures during this #Quad3 to #Quad2 Phase Transition in the USA? How challenged have you been riding China’s #Quad3 Stagflation while adding EM Longs?
Of course it’s been challenging. That’s The Game. Each and every single day you are faced with refreshing and/or changing your positioning. The longer you “wait” while a market is in Phase Transition, the less alpha you’ll generate.
Some people tell me they’re too “long-term” or too “big” to make all of the Quad Shifts (i.e. economic Phase Transitions). Others tell me they can’t wait to front-run the next Quad Shift I’m going to make! To each their own.
The Game is the game. And the score is the score.
What I love about trying to win The Game (both short-term and long-term) is that score is a fact and not someone’s political or emotional fiction. The best parts of The Game happen when my TRADE & TREND Signals change.
In ROC (rate of change) terms, what’s changed as of yesterday’s US Equity market close?
A) RETURNS: those were the 63rd and 40th all-time closing highs of 2021 for SPY and the NASDAQ
B) EARNINGS: 440 SP500 companies have reported aggregate year-over-year EPS growth of +41.8%
C) USD and UST: USD is back up towards the top-end of my Risk Range; UST Yields are towards the low-end
Going a little deeper on A, B, and C:
A) Top 3 Q4 Returns: Consumer Discretionary (XLY) +17.0%, Tech (XLK) +11.3%, and Energy (XLE) +10.4%
B) Earnings for our Expedia (EXPE) re-opening and #Quad2 re-acceleration Long were fantastic (stock +12%)
C) USD and UST corrected alongside the CRB Commodities Index and Oil yesterday because that’s what they do
How about in Global ROC terms?
A) CHINA: stocks were down another -1.0% in Shanghai to -2.2% in the last month and remain Bearish TREND
B) HONG KONG: stocks got pounded for another -1.4% loss overnight and remain Bearish TRADE and TREND too
C) PHILLIPINES: stocks were +1.9% overnight to +5.2% in the last month and remain Bullish TREND @Hedgeye
Long the Philippines (EPHE)? Yep, on the Macro Show yesterday I told you that I just added it as our latest EM (Emerging Markets) Long. If you’re upset that you missed that, watch the Macro Show and you won’t get my real-time moves on delay.
Why am I Long the Philippines (EPHE), Poland (EPOL), Israel (EIS), etc vs. my China (FXI), Hong Kong (EWH) and South Korea (EWY) Short? A: #process. It’s the Signals front-running their economic Quads, eh.
Per Quad Drago’s latest GIP Model (Quads) updates, the Philippines recently (i.e. during Q4) Phase Transitioned from #Quad3 to #Quad2 like the USA did. Philippines has the best Quad Count (next 4 quarters) in all of Global Macro at 2-1-2-1.
Was I making all of these Global Macro moves 14 years ago? A: absolutely not.
But, unlike many, I strive for what Aidan McCullen calls “permanent reinvention.” As he says, it’s a “mindset for individuals, organizations, and life.”
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.49-1.69% (bullish)
UST 2yr Yield 0.40-0.52% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 15,197-16,024 (bullish)
Tech (XLK) 158.37-167.01 (bullish)
Utilities (XLU) 65.94-67.58 (bearish)
Energy (XLE) 56.20-60.01 (bullish)
Financials (XLF) 39.65-41.00 (bullish)
Shanghai Comp 3 (bearish)
DAX 15,602-16,099 (bullish)
VIX 14.21-17.29 (bearish)
USD 93.18-94.44 (bearish)
GBP/USD 1.342-1.374 (bearish)
CAD/USD 0.801-0.812 (bullish)
Oil (WTI) 78.39-86.38 (bullish)
Nat Gas 5.11-6.37 (bullish)
Gold 1 (bearish)
Copper 4.28-4.56 (bullish)
MSFT 321-346 (bullish)
AAPL 147-154 (bullish)
GOOGL 2 (bullish)
NFLX 646-698 (bullish)
TSLA 1096-1294 (bullish)
Bitcoin 59,385-66,343 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
