“As a leader, you can change your piece of the world. It’s your ship.”
-Captain Michael Abrashoff
This will be one of the last Early Looks of 2022 for me. What a year it has been! There’s never “just one thing” in markets or a leadership-life, but there are particular things and moments that we should all learn and grow from.
It’s Your Ship is a > 20 year old #behavioral book with timeless lessons that I cited earlier this year. The Captain from “The Best Damn Ship In The Navy” gets it. Performance is all about your process and your people executing on that process.
Benfold (the name of his ship), “went on to beat nearly every metric in the Pacific Fleet. Frequently the crew broke their own existing records. Directly, I had nothing to do with these triumphs. My job was to create their environment” (pg 29). It’s Your Process.
Back to the Global Macro Grind…
How did your Asset Allocation, Risk Management, and Decision-Making #process change and evolve throughout 2022? If you could do it all over again, what would you do? Do you think being more flexible in the short-term would have augmented your Full Investing Cycle return?
While my team can always get better, I’m very happy with how we navigated Phases 1 & 2 of The Bear Market. Phase 3 started at the beginning of December. As a reminder, Phase 3 is when:
A) Consensus starts to realize that Recession Risk > yesterday’s Peak Cycle Inflation news
B) The ROC (rate of change) of GROWTH and INFLATION slowing at the same time = PROFITS Slowing
C) We get the Liquidity Crisis and Credit Event Phase of The Bear Market
Been there, done that. This is my 3rd major bear market in going on 25 years. Some of the people and places changed again this time… but the herd behavior didn’t. The sequence of The Cycle is doing what cycles do as they slow into a #Quad4 Recession: it’s cycling.
On today’s Micron (MU) “news” (guiding down again and firing 10% of their people) we have a good example of “pricing in” The Cycle:
A) Some people bought both MU and Semis (SMH) at the literal all-time high of the SP500 in the 1st week of JAN 2022
B) Some people chased MU and Semiconductor “charts” at the APR, AUG, and NOV bear market lower-highs
C) Those people got absolutely crushed, multiple times, in 2022
MU has crashed > -20% from where you could have chased it in NOV 2022 at $63!
I get it. Semis are cyclical. At some point they will “bottom”… but wow, at major points of APR, AUG, and NOV they impaled whoever thought they couldn’t cycle (and crash again) off lower-cycle-highs.
Now let’s do a LIVE shot of the Phase 3’s Profit Recession:
A) 14 of the SP500’s companies have reported an aggregate Earnings Recession of -8.7% year-over-year
B) That’s down from +3.8% year-over-year EPS Growth in Q3 of 2022 … and
C) That’s down from +87.3% year-over-year EPE Growth in Q2 of 2021
Never forget Q2 and Q3 of 2021. Those were the HIGHEST US REVENUE and EPS GROWTH rates in human history. VERY bad bubble behavior was born out of straight-lining those growth rates in both profitability and individual Net Worth. Reversing The Wealth Effect really matters.
Now, for the next 2-3 quarters, we have to “comp” the 2yr “base effects” of those bubbles in GDP, Revenues, Profits, etc.
“But, but, KM… I haven’t been Bearish Enough all year long, especially when I chased charts in APR, AUG, and NOV… because I wanted to … and needed to believe it was all priced-in… isn’t it, yet?”
That is one of THE most important questions that NOT many important people have answered well in the last 2 PROFIT RECESSIONS that I navigated both patiently and profitably ( and 2008).
So let’s just start with that. It’s not just their bullish biases and narratives vs. my constant re-positioning (I just went back to 1 LONG and 5 SHORTS in RTA yesterday and -5.9% Net SHORT in my MFO Long/Short Book vs. +5.1% Net LONG on 12/19)…
It’s that they’ve either NEVER made money in a bear market or been in one!
So what’s next?
A) The Blackout
B) The Pre-announcements
C) The Credit Events
Looking at the Prime Brokerage data, if you’re like consensus “Fundamental” Long/Short Hedge Funds whose NET Long position moved to the 100th percentile (on a 52 week look back) BUYING Tech in November, I recommend prayer and suggest blacking out for the holidays…
But what I’m really talking about here is the Corporate Buyback Window blacking out officially for the rest of 2022 (they can’t be 10-25% of the daily volume in a HIGH Short Interest and/or Small Cap stock, keeping it away from gravity).
Pre-announcements (Micron) are pending. So are much larger 2023 downward revisions to Revenues and Earnings (if companies don’t, I highly suggest you don’t believe them) as we hit a headline Q/Q US GDP print of -2.87% (our Nowcast) for Q123 (reported in April).
And, on The Credit Events, we’re already seeing BIG ones from Blackstone’s BREIT to Sam Bankman Fraud to Elon’s Love of Leverage (TSLA). Did I mention The Maestro’s MSTR? Oh what The Mother of All Bubble bets that was by The Saylor. What a year. What a cycle!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 3.39-3.72% (neutral)
UST 2yr Yield 4.14-4.41% (bullish)
High Yield (HYG) 73.44-75.55 (bearish)
SPX 3 (bearish)
NASDAQ 10,351-10,975 (bearish)
RUT 1 (bearish)
Tech (XLK) 121-130 (bearish)
Healthcare (XLV) 133-141 (bullish)
Defense (ITA) 108-113 (bullish)
Utilities (XLU) 68.81-72.72 (bullish) `
Shanghai Comp 3032-3157 (bearish)
VIX 19.64-25.21 (bullish)
USD 103.30-107.27 (bullish)
CAD/USD 0.728-0.741 (bearish)
Oil (WTI) 70.95-79.77 (bearish)
Gold 1 (bullish)
Silver 22.61-24.64 (bullish)
TSLA 129-165 (bearish)
Bitcoin 16,217-17,606 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
