“To fight noise, they first have to admit that it exists.”
-Danny Kahneman
How many years have you been risk managing markets? Do you have noises in your head? It’s ok. If you couldn’t tell, into year 23 of doing this gig, I’m a little squirelly sometimes myself.
But it’s ok. If you have a risk management #process built into your real-time decision-making that is designed to fade the noises, that is. As Kahneman reminds us in Noise, “wherever there is judgment, there is noise.” (pg 258)
‘But, but, KM… was that the bottom? Why isn’t #Quad4 already priced in? What if it really wasn’t a bubble?’
Back to the Global Macro Grind…
While I rarely get the last of those 3 questions, I get the other 2 a lot. I’ve been getting them since January, lol.
You get that to get a real rally from here (i.e. one that recaptures @Hedgeye TRADE levels of what remain clean-cut Bearish Resistance), you need to buy the #BubbleCaps that still have the heaviest weights in the major indices and Sector ETFs, right?
In addition to levering up long TSLA again, what else would you need to see and/or believe?
- That the Consumer is in “great shape”
- That Inflation has peaked and is going to rollover for real
- That the Fed is going to back off, just a little bit?
So you’re saying there’s a chance! Here’s what we think about A, B, and C:
- The Consumer is #slowing, big time – short Consumer Discretionary (XLY), Retail (XRT), etc. again
- Our Inflation Nowcast for May has ramped right back to where it was in April (i.e. not #slowing for real)
- The Fed is way more hawkish than Fed Put Fans want to believe
Again, we’ve obviously been Short The Consumer and Tech (XLK) since January, so this morning’s note isn’t a “big new call”, per se. It’s simply a reminder that buying into the biggest 2-day rally in US Retail (XRT) since 2008 is loaded with noise.
That “rally” wasn’t bullish in 2008, btw!
And, yes, I was accurately bearish on both the US Consumer and Real GDP #GrowthSlowing during all of those 2008 bear market bounces. Remember the time when Bernanke thought Oil busting a move > $110 wasn’t a US Consumption problem? LOLx3
So while you’re listening to self-proclaimed macro gurus on Twitter who were sucking their thumbs in college back then, take comfort in having a washed up former hedge fund manager at the helm here!
For me, 2008 was a lot of fun because I was starting Hedgeye and basically carpet-bombing the buy-side’s inboxes with bearish research notes. Looking back, they were probably poorly written… but they were accurate (and very annoying).
You see, back then, no one really did Independent Research from a buy-sider’s perspective.
And you know what that new “noise” did to some people in the hedge fund community? It triggered them, big time. I still have an email from a Boy Genius by the name of Gabe from back then. I can’t publish it. Boy was it complimentary! Lol
Thankfully, those days of buy-siders trying to bully their super “smart” opinions about their great “stock picks” are long gone (so are some of their hedge funds). The Game has changed tremendously. Only those who have evolved are left playing it.
But going all the way back to when I was the buy-side analyst (then Consumer PM) in 2000-2005 is where the real story started.
That’s when I realized that doing all of my “one on one” meetings with the companies (i.e. my super-duper stock “picks”) was running into a major problem: oversupply.
Yep. Too many buy-siders seeking the same few “data points.” And there was another problem: under-supply.
Oh yes. The publicly traded consumer-facing companies that I was meeting with and modelling had VERY few CFO’s who had a clue on what were to become The Quads.
Back then, we called them what we still call them today: The Pods.
Architecturally, The Quads were born out of the same modelling framework as The Company Pods. The Quads were designed to front-run both The Pods and the CFOs who opined on them.
*Pods = ROC (rate of change) of Pod1 (REVENUES), Pod2 (*Cash Flow), and Pod3 (FCF/ROIC)
In my fancy new Macro Models I simply replaced Pod1 with REAL GDP and Pod2 with INFLATION. And, after a LOT of trial, error, and tweaking of the models, voila – I had a front-runner to ask CFOs about (i.e. what they weren’t yet forecasting).
So, almost 20 years after I was tasked with risk managing every “forecast” from the CFO of Macy’s (M), you get to do that for yourself this morning. Do you believe their Consumer is “in great shape” forecast for Q2, Q3, and Q4 of 2022?
I don’t. And I’m looking forward to working through the Macy’s Pod Model with my Partner Brian McGough today too.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 2.66-2.99% (bullish)
UST 2yr Yield 2.41-2.75% (bullish)
High Yield (HYG) 75.02-79.98 (bearish)
SPX 3 (bearish)
NASDAQ 11,013-11,961 (bearish)
RUT 1 (bearish)
Tech (XLK) 128-138 (bearish)
VIX 25.70-33.36 (bullish)
USD 101.11-104.99 (bullish)
Oil (WTI) 106.52-115.34 (bullish)
Nat Gas 7.77-9.27 (bullish)
Gold 1 (bullish)
Copper 4.11-4.36 (bearish)
TSLA 610-749 (bearish)
Bitcoin 26,790-30,821 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
