“Set the stage for candor by building feedback moments into your meetings.”
- Reed Hastings
With his stock having crashed -44% from where both the NASDAQ and USA’s #Quad2 in Q4 economic acceleration was fully “priced in” (November 17-19th, 2021), I trust that Hastings takes the market’s feedback seriously.
The aforementioned quote comes from a good chapter in No Rules Netflix that Reed Hastings and Erin Meyer titled “Say What You Really Think.” If I don’t do that in my intraday Institutional Client meetings, I don’t get paid.
Institutional Research used to be 100% of our revenues. Now it’s half that, but it’s a growing business that I love for a lot of reasons. The biggest one is big-time client feedback on both their positioning (and mine vs. theirs).
I can always tell when clients are off-sides, not because I’m super insightful – because they tell me they are.
Unlike CNBC pundits and perma-nailers on Twitter, the Institutional Buy-Side gets things wrong (like I do). Their job isn’t to stay wrong. It’s to figure out where The Pain Trade remains and to get on the right side of The Quad.
Back to the Global Macro Grind…
I tweeted it last week… so… like most things I do, it’s “out there” for all to have seen (if they chose to pay attention). What I wrote was that I thought I convinced some major Institutions to get on the right side of #Quad4.
That’s not meant to be “cocky” or whoever my latest group of inexperienced Twitter Trolls needs me to be in order to “feel” better about their Macro Unawareness. It was meant to help others get on the right side of the trade too.
So what you observed at 39 VIX and yesterday’s intraday SPY lows was just more of that, de-grossing.
What is de-grossing?
A) It’s when you take your gross invested position down … and
B) In the case of Long/Short Hedge Funds, it’s also when you’re taking your LEVERAGE down
Going on good Prime Brokerage data sources:
A) Long/Short “Fundamental” Hedge Funds came into the day already down, on average, -7% YTD…
B) And the aggregate Net LEVERAGE Ratio was taken down by about -10% from record highs
That last part, “from record highs”, is an extremely HIGH level of LEVERAGE. And, since I “set the stage for candor” this morning, “saying what I really think” about that isn’t new inasmuch as my aforementioned tweet isn’t:
A) Running max LEVERAGE works great during #Quad2 economic accelerations … until
B) #Quad2 Phase Transitions, economically, into the opposite condition = #Quad4
Then the combination of LEVERAGE and ILLIQUIDITY ends up in 39 VIX and people puking up the same exposures.
Yeah, now the “smartest” people reading this are going to say, “that’s it – the bottom is in – this is the capitulation signal we needed, reading KMs rant.”
Uh, no. That’s not signal. Those are just my words.
My #VASP (Volatility Adjusted Signaling Process) is The Signal. It front-runs The Quads. And, if the Fed wants to tighten into back-to-back #Quad4 US economic decelerations, you’ll probably see the VIX in the high 30s again.
Remember, these performance, de-grossing, and de-leveraging stats represent the aggregate, not every single hedge fund and/or Long Only manager’s separately timed decisions to navigate the pending Quads.
What’s not ironic about this is that at this time last year, some Hedge Funds were imploding for A) the same reason (being Macro Unaware in their principle orientation) and B) during the opposite pending Quad Count:
A) Remember, at this time last year, you wanted to be setup for the Mother of All #Quad2 accelerations…
B) That included being long everything from Crap High Short Interest Retailers to Small Caps and SPACS
Did they learn anything about either themselves or their process? I don’t know. My job isn’t to hand hold everyone’s evolution in The Game. My job is to signal when Quad Shifts are signaling.
While some have tried to copy and/or steal my Quads, when signaling on their shifts, I’m the one who knocks.
With the Russell Crash (IWM) that I called for last week having happened intraday yesterday (-20% from its #Quad2 Cycle Peak) joining that of Crypto, I think the NASDAQ is next.
Will the SP500 crash? It’s only down -7.5% from its ALL-TIME high established on JAN 3rd of THIS year, don’t forget.
How about High Yield and Junk Bonds? Well, the update I’ve been giving Institutional Clients who are in those markets has been that both HYG (High Yield) and Junk (JNK) broke my TRADE and TREND Signal levels of support.
That is not good.
And it’s going to be #NotGood faster if/when we get a breakout in my High Yield OAS Spread Signal > 330 basis points over Treasuries. PE Powell, write that number down. And thank me later for my candor.
When it comes to protecting your boys in the Big Houses, you’re the one who knocks on going dovish. Don’t screw it up like you did when you were a rookie on the job during #Quad4 in Q4 of 2018.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.66-1.89% (bullish)
UST 2yr Yield 0.86-1.12% (bullish)
SPX 4 (bearish)
NASDAQ 13,502-14,930 (bearish)
RUT 1 (bearish)
Tech (XLK) 150-164 (bearish)
Consumer Staples (XLP) 75.20-77.41 (bullish)
Utilities (XLU) 67.12-70.08 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 26,990-28,353 (bearish)
DAX 14,991-15,772 (bearish)
VIX 21.40-37.78 (bullish)
USD 94.71-96.62 (bullish)
Oil (WTI) 79.57-86.78 (bullish)
Nat Gas 3.41-4.40 (bearish)
Gold 1 (bullish)
Copper 4.31-4.58 (bearish)
Bitcoin 33,561-41,295 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
