“Perhaps the most undervalued attribute for humans is dogged, obsessive, and boring discipline.”
- Nassim Taleb
In Safe Havens – Investing For Financial Storms, that’s what Taleb had to say about the Portfolio & Risk Managers who are really good at this (especially at The Cycle turns).
There’s going to be a hell of a storm hitting Tampa, Florida this week. Godspeed to all of you who are either down there or have friends and/or real estate in one of the most beautiful places on earth.
The beauty of following fractal market and economic cycle patterns is that it’s measurable.
Taleb doesn’t do The Quads, but he does “tail risk hedging.” In the aforementioned quote he was complimenting his buddy, Mark Spitznagel’s, risk management process. “I never saw him once deviate a micro-inch from a given protocol.”
Stay with your process.
Back to the Global Macro Grind…
What’s your process? What are your protocols? What are your MIN/MAX position limits? How do you risk manage (i.e. trade) your Core #Quad4 positions? WHEN do you touch those positions? WHAT do you do in terms of SIZE, incrementally?
When I wrote Diary of a Hedge Fund Manager in 2010, I wasn’t really good at this. I’m still not. No one is really good until they Summit 3 US Economic Cycle Peaks on the Long Side and make it back down, alive with all your $, on the Short Side.
To get really good, you have to adapt, evolve, and make a LOT of mistakes. While I am humbled by the #HedgeyeNation Community that we’re building together, I am not NostraMuckerDamus. I am just a grinder.
And I am a disciplined grinder.
So instead of recapping “why” a #Quad4 Hurricane has already landed in your portfolios, let’s simply move onto the next play, as we’ve been coaching you to do for many years.
WHEN do we touch our positions?
A) We sell/short when prices are approaching the TOP-end of our Risk Range™ Signals
B) We buy/cover when prices are approaching the LOW-end of our Risk Range™ Signals
AUG 17th, 2022 (i.e. at the BIG-LOWER-HIGHS within Bearish @Hedgeye TRENDs), at SPX 4305 and USD 105 (USD Index), was WHEN to execute inasmuch as yesterday was a day not to do nothing.
What did you do yesterday?
A) After buying/covering, I went from -5.8% Net SHORT in my Long/Short Book to -1.7%
B) For positional context, on SEP 12th I was -24% net SHORT (and my MAX is -25% Net)
Realizing that most “fundamental” (bull market) Long/Short Hedge Funds are petrified to run anything Net Short, is important at this particular moment in both market and Cycle Time. If more people did it the way we do, we’d make less money.
That’s not being “critical”, btw. It’s being factual. Per the latest Prime Brokerage data, the average return of a Fundamental Long/Short Hedge Fund is down -19% YTD vs. SPX -23%. That means the “average” hedge fund doesn’t know how to hedge.
If I wanted to be average, I wouldn’t be up at this bloody hour ranting to you. I want us all to #GetBetter, every day.
Back to what I did yesterday:
A) I took my Net Exposure (i.e. Net SHORT) position down so that I can take it up again (today) on green
B) I was running really LOW GROSS (i.e. Gross Long Exposure) against that Net SHORT position
That’s another go-to move when you see a #Quad4 Hurricane coming – batten down the hatches (TAKE DOWN YOUR GROSS LONG EXPOSURE TO YOUR SECTOR AND STOCK PICKS), big time!
A) If I didn’t, I’d have been long Utilities (XLU) for their -2.4% beat down day yesterday … and
B) No, today is not the day to buy Utilities on green!
Why?
A) WHEN US Equity Volatility is headed into (and remains in) the F-Bucket, that’s the discipline of the process
B) VIX 32, NazVol (NASDAQ Volatility) 37, and RussVol (Russell 2000 Volatility) of 37 are not “Get Long” signals!
And yes, I get that there’s been some crashing and capitulating in the last 3-4 trading days (that’s why I was covering shorts), but that doesn’t mean that the #Quad4 Recession is over.
It’s the beginning of Macro Tourists realizing that:
A) The Inflation Cycle Peaked in June (Oil has crashed -37% since)… and that wasn’t a “buy signal”…
B) It was the beginning of consensus (ex-TheFed) realizing that it’s a RECESSION Signal
No one’s narrative will matter to me this morning. The only things that matter are the numbers born out of the latest bear market bounce to lower highs. While the Recency Bias is that every bounce is going to last (like it did in July-August):
A) This one has to happen in the BLACKOUT window for company buy-backs… and
B) This one has to overcome epic CTA Selling in ANY kind of a up/down/flat tape
If you need more “color” on that, call Goldman or Blackrock or whoever sees all of the flow. I see all I need to see to make my next set of plays. North of 90% of the companies in the SP500 will be blacked-out by week’s end.
They can’t buy their stocks back (with recessionary cash flows I might add) until late OCT. And per Goldman’s data, they see CTA’s SELLING $36B of US Equities in a flat tape, -$45B in a down one… and still selling $19B in an “up” tape.
Stay dogged and disciplined, my grinder friends.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 3.35-3.88% (bullish)
UST 2yr Yield 3.71-4.32% (bullish)
High Yield (HYG) 71.08-74.37 (bearish)
SPX 3 (bearish)
NASDAQ 10,616-11,674 (bearish)
RUT 1 (bearish)
Tech (XLK) 120-131 (bearish)
Utilities (XLU) 69.27-74.10 (bearish)
VIX 25.78-33.71 (bullish)
USD 109.65-114.22 (bullish)
EUR/USD 0.959-0.989 (bearish)
GBP/USD 1.066-1.129 (bearish)
Oil (WTI) 76.37-86.40 (bearish)
Copper 3.27-3.51 (bearish)
Bitcoin 18,105-20,565 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
