“This tendency to remember fearful situations can be adaptive in some cases.”
- Dr. Gio Valiante
Or not.
In both golf and running money, as Gio reminds us in Fearless Golf, “these persistent memories become distractive.” (pg 33)
If you work for a panic (or performance) stricken hedge fund who was covering shorts on green yesterday, I really think you should either leave or convince your boss to adapt and evolve. There’s a much better way.
Back to the Global Macro Grind…
It’s easy for me to be a hedge fund critic because that’s where I grew up in this business.
While I know that some of my critics are supremely intellectual (it’s below them to talk about picking bottoms), I also know that some of the “smartest” people (on paper) have some of the worst performance results I have ever seen this year.
Should I apologize for that?
Nope. They should. Like me, when they have a bad day, week, quarter, or year, they should find a way to #GetBetter. Despite all of the societal noise we have to deal with these days, this is still Wall Street. You either generate alpha, or you don’t.
I didn’t generate alpha yesterday. I lost -51 basis points of my hard earned capital.
I’ve had a few worse days than that this year. If I didn’t, I wouldn’t have had my many best days. In a bear market, you only make big money if you can handle staying with the small losses required to gross up your short positions.
You know that +3% QQQ days don’t really happen in bull markets, right?
That’s right. Inclusive of yesterday’s bear market rally, the NASDAQ is still in absolute #Quad4 Crash mode, down -27.1% from its #Quad2 Cycle Peak. That means the hedge funds that were Macro Unaware and Levered Long GROWTH only need to be up +37% (from here) to get back to break-even.
You know that’s not true, right? Some of the most levered “hedge” funds are down a lot more than -27%.
And, I know… I’m the bad guy for calling out the score for what it is. That’s ok. If you’re an LP in some of these “hedge” funds that don’t hedge, your financial reality is worse than any word that I can write this morning.
Goldman won’t call anyone out this morning, but their Prime Brokerage business can tell you that their “Most Shorted Basket” (of stocks) was up over +5% yesterday. It always sucks when your longs go up less than your shorts. It sucks more when you short low and cover high. As for me:
A) I haven’t sucked this year … and
B) I didn’t do that
Here’s what I did in the last week:
A) At this time last week I covered almost EVERY single stock short in Real-Time Alerts
B) I went to -2% net SHORT last week as well
As of this morning:
A) I have 1 LONG and 12 SHORTS in Real-Time Alerts … and
B) I’m back to -18% net SHORT in my Long/Short Book
In my Long Only MFO (Mucker Family Office) accounts I’m at 76% Cash and I raised my US Dollar position back up to 8% from 4% last week.
It really doesn’t matter what the super smart people say or think about my positioning and/or how I think about covering on red and re-shorting my Core Shorts on green. I do what I do. Unlike most people, I #timestamp every move I make in real-time.
While I don’t have “rules” that govern my Net Exposure (net Long or net Short), I’ve infrequently gone beyond -25% net SHORT in 2022. Generally, my “net” positioning (longs minus shorts) has a very different look than your consensus stock-picking hedge fund.
For example, as of this morning, my Top 3 LONG positions (inside of a -18% net SHORT position) are:
- MLN
- HRL
- FNV
My Top 10 SHORT positions (ranked in terms of size) are:
- JNK
- HYG
- XRT
- FXE
- FXF
- FXB
- XLF
- QQQ
- MSTR
- EWQ
No, my long MLN (AMT-Free Municipal Index ETF) isn’t going to make me famous like some of the fancy stock pickers on CNBC. But you can run the math on any of my current Top 10 Shorts this year and know that I’m not relegated to eating HRL’s Spam.
The most important thing about executing (and generating alpha on the short side) in a bear market isn’t WHY you’re shorting something. It’s all about WHEN you re-short something. Grossing up your shorts and layering in short-term puts isn’t easy.
If it was easy, more hedge fund managers would be famous for hedging!
On that score, timing matters more than anything. For example, coming into yesterday, I didn’t have MSTR in my Top 10 Shorts. It wasn’t in my Top 20. And while it’s rare that a single stock will be in my Top 10 (Index and ETFs are always sized larger than single stocks), it earned that spot on green.
Prior to yesterday, my Top 10 Shorts included things that are no longer in my Top 10 Shorts like:
A) Corn in CORN terms
B) Soybeans in SOYB terms
Why? Who cares why, fundamentally? Those shorts were DOWN, so I COVERED-SOME of those and re-shorted XRT, HYG, and Euros (FXE) on green.
For those of you who either want to be the boss or help make your boss better at this, I highly recommend a Go Anywhere Short Selling Strategy. That’s going to open your mind to endless possibilities versus the common hedge fund problem of having to live in a box.
Living and thinking in a box? Yep. You know how many people in the hedge fund business have to have all their short positions in US Equities and/or just ONE Sector of US Equities? A: LOTS.
And I get that that’s a job. It’s actually a highly compensated job. And it should be. Why? It’s REALLY hard to generate alpha in a box like that. Whoever can do that (I personally can’t) should get paid in size.
I don’t know if or when I’ll get paid on grossing up my shorts like I have many times in the last 6 months, but that’s what I did yesterday.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 3.03-3.28% (bullish)
UST 10yr Yield 2.83-3.11% (bullish)
UST 2yr Yield 2.95-3.25% (bullish)
High Yield (HYG) 72.99-75.93 (bearish)
SPX 3 (bearish)
NASDAQ 11,005-11,795 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-136 (bearish)
VIX 23.75-30.77 (bullish)
USD 105.76-108.75 (bullish)
EUR/USD 0.995-1.030 (bearish)
Oil (WTI) 92.37-104.59 (bearish)
Nat Gas 5.65-7.55 (bearish)
Gold 1 (bearish)
Copper 3.10-3.57 (bearish)
Bitcoin 18,665-23,892 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
