“The glaring contrast between the traditional theories and the facts.”
- Friedrich Hayek
That’s what Hayek observed about Carl Menger’s publication of Principles of Economics. As Spitznagel reminded me in The Dao of Capital, “it was never Menger’s intent to cleave with the classical economists and establish a unique school of economic thought…” (pg 89)
But cleave he did. And that was all the way back in 1871! Whether you’ve studied and/or believe in the Austrian School of Economics or not, you should, at a bare minimum, be aware of it. Every Macro Economist didn’t “learn everything” from Ray Dalio.
On that score, I’m thinking that if Hayek and/or Ludvig von Mises were alive today, I’d have a lot more credible company explaining what this inverted yield curve is signaling: #RecessionRisk Rising.
Back to the Global Macro Grind…
It’s been a tough week for the #Quad4 US Equity Shorts, but a great one for the #Quad4 Commodity Shorts.
Corn (CORN) is down another -1% this morning, crashing to new Cycle Lows. Soybeans (SOYB), Wheat (WEAT), etc. are getting smoked towards the low-ends of their Risk Ranges too.
Now the Macro Tourist type might think that “Down Inflation, Down Bond Yields” is a “Buy Signal For Growth Stocks.” I hope they didn’t buy Snapchat (SNAP) or Intuitive Surgical (ISRG) with that thesis yesterday.
I don’t do thesis. I do The Quads and The Pods. Said never @Hedgeye that you buy GROWTH with Commodities and Bond Yields collapsing in #Quad4 with #RecessionRisk Rising.
What are The Pods?
A) POD1 = REVENUES, POD 2 = EARNINGS (or Cash Flows)
B) When PODs 1 and 2 are #accelerating, buy the stock
C) When PODs 1 and 2 are #decelerating, short the stock
As everyone @Hedgeye knows, The Pods gave birth to The Quads. The fundamental modeling premise is precisely the same. Instead of nowcasting Macro Economic Data (The Quads), our analysts are measuring and mapping The ROC (rate of change) of company data.
This is the most obvious reason why you don’t buy GROWTH when The Pods are in the equivalent of #Quad4:
A) The ROC of REVENUE Growth is #decelerating (SNAP’s decelerated to 0% growth, just missing “expectations”, lol)
B) The ROC of EPS or EBITDA is #decelerating
What makes for an even better short is not having any EPS or EBITDA whatsoever. Oh SNAP!
So are you going to run out and buy some Advertising Cycle stocks with #RecessionRisk Rising? How many buy-side noobs have actually seen a recession in Corporate Profits that lasted more than a month?
Andrew Freedman has done world-class Cycle Research on the Ad Cycle. The Pods for GOOGL are going to get nasty bro. Short it.
Yeah, I get it. Some of our best TRENDING (3 months or more) shorts (i.e. that have been working for more than 6 months) haven’t worked for the last 6 trading days. And I’m the one who gets accused of being “short term.”
Actually, I think we’ve been better than any research firm at staying with the intermediate to long-term Full Investing Cycle, no matter what the short-term market moves, for going on 15 years now.
From a bottom-up stock-picking perspective, here are some cycles within The Cycle to be short of heading into a #Quad4 Recession:
A) The Advertising Cycle
B) The Inventory Cycle
C) The Capex Cycle
These are all things that get cut when company executives come to realize how quickly their revenues are #Quad4 Slowing.
Update on my Long/Short Book – as of yesterday’s close I’m -22% net SHORT and here’s my Top 10 Shorts (ranked in terms of size):
- JNK
- HYG
- QQQ
- XLK
- FXE
- XLY
- GK
- MSTR
- IWM
- FXF
Like I said, my best Commodity Shorts are approaching the low-ends of their Risk Ranges. When that happens I COVER-SOME so that I can re-short MORE on bounces to lower-highs. Plenty of those were in my Top 10 and aren’t, for now.
While my High Yield (HYG), Junk (JNK), and Foreign Currency (FXE, FXF, etc.) positions are usually in my Top 10 because they have lower betas than Stocks and Commodities (therefore I can put on more beta adjusted risk), my GROWTH Shorts move like my Commodities.
Last week when QQQ, IWM, etc. were approaching the low-ends of my Risk Ranges, they fell out of my Top 10. Now, as you can see, they’re all right back to where they’ve been, multiple times, in the last 6-7 months.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 30yr Yield 2.98-3.23% (bullish)
UST 10yr Yield 2.79-3.09% (bullish)
UST 2yr Yield 2.98-3.29% (bullish)
High Yield (HYG) 73.07-77.15 (bearish)
SPX 3 (bearish)
NASDAQ 10,901-12,103 (bearish)
RUT 1 (bearish)
Tech (XLK) 125-140 (bearish)
VIX 22.96-29.04 (bullish)
USD 106.11-108.76 (bullish)
EUR/USD 0.994-1.029 (bearish)
Oil (WTI) 93.02-103.71 (bearish)
Nat Gas 5.81-8.32 (neutral)
Gold 1 (bearish)
Copper 3.14-3.49 (bearish)
META 150-185 (bearish)
GOOGL 107-116 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
