“Conventional wisdom is an oxymoron.”
-Bill Walsh
That’s another good one-liner from one of the best NFL coaches of all time. It comes from a chapter in The Score Will Take Care Of Itself titled “Essentials Of A Winning Team.” I’d have built nothing without finding great players for our team.
“Coaches and scouts in the NFL view the raw speed demonstrated in the 40-yard sprint as a litmus test of a receiver’s potential… I took a somewhat different view. I valued the blazing speed but also prized what I call “functional speed” – how fast a player can move with a ball in his hands AFTER he’s in stride.” (pg 166)
Walsh then went on to tell the story of seeing a player by the name of Jerry Rice score 5 touchdowns in a game for Mississippi Valey State: “he was not considered a top-flight prospect… because he had a mediocre 40-yard time – not much better than 4.6 seconds. They considered him a 5th or 6th round draft pick.” Walsh made Rice his #1 draft pick.
Back to the Global Macro Grind…
Do you have a Jerry Rice in your portfolio? How well do you ride your winners after you find them?
For me the answer to that question isn’t what it used to be. The Game has changed dramatically since I first started picking stocks in 1999, and so has my multi-factor, multi-duration, rules-based strategy.
Here’s a snapshot of Old Wall Keith from 1 (he did The Pods):
A) Screen for “cheap stocks”
B) Find the one’s that have Bullish ROC (rate of change) catalysts for Revenues and/or Cash Flows
C) Meet with management to confirm or deny potential catalysts, modeling points, etc.
Since The Quads were born out of what we call The Pods, my analysts are still coached to incorporate most of A, B, and C, but there’s now MUCH more to picking a stock than that.
*Coaching Notes (on The Pods)
- Pod1 = The ROC of Revenues
- Pod2 = The ROC of Cash Flows (EBIT or EBITDA)
- Pod3 = The ROC of Capex and FCF (free cash flow)
Therefore The Quads substituted a country’s Real GDP for Revenues, INFLATION for Cash Flows, and Central Bank Policy for Capital Allocation (Capex).
Whoever wants to tell you that I got The Quads “from Dalio” after I read his book, Principles, 18 years into my journey in 2017, is either dumb, or hoping you’re dumb enough to believe that.
Both the architecture and evolution of any accomplished investor’s research and risk management #process is THEIR life’s work. I’m very proud of mine. I will defend the intellectual property embedded in it to the death.
Fast forward from “making The Cycle turn” (from bearish to bullish on US Growth) in the 2H of 2016 until making The Turn on INFLATION today, here’s what Confident Keith (lol) does when he’s picking a stock:
A) Screen for Bullish TRADE and TREND ™ Signals (from my Research Team’s Long/Short List)
B) Discuss those Signal Strength Stocks with our analysts, daily, on The Call @Hedgeye
C) Review and back-test the Sector Styles & Factor Exposures of each stock in each Quad
I can’t remember the last time I’ve “met with management.” On Global Macro matters, I don’t need to meet with the Fed. I know when they’re lying to me about inflation. So do The FX and Bond markets!
And, while this might rub a certain type the wrong way, I NEVER start with “valuation” (like Old Wall Keith did).
Facts about both The Modern Machine and what happens in #Quad2:
- “Expensive” Stocks get more expensive
- “Inflation” often accelerates at an accelerating rate
- Winners smoke losers
So, again, why wouldn’t you ride your winners? The #1 Factor Exposure that drives The Machine is Momentum. By my fractal definition, if something is signaling Bullish on BOTH my TRADE and TREND durations, it has momentum.
Here’s another analogy in trying to coach the same thing:
Are you going to watch The Masters? If you’re betting on it, and Scottie Scheffler is building momentum (making a bunch of birdies) and Justin Thomas is having emotional struggles, falling back in the field, who do you put your money on?
Scheffler is ranked #1 in the world, so he’s the best Bullish TRADE and TREND player you can be long of. Are you going to sell him because he’s “overvalued”? Are you the going to put that capital into Thomas or AAPL this morning?
Career Lesson: find winners and ride them.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 4.25-4.60% (bullish)
UST 2yr Yield 4.61-4.99% (bullish)
High Yield (HYG) 76.17-77.21 (neutral)
Investment Grade (LQD) 105.60-107.39 (bearish)
SPX 5134-5253 (bullish)
NASDAQ 16,026-16,493 (bullish)
RUT 2019-2083 (bearish)
Tech (XLK) 203-210 (bullish)
Insurance (IAK) 110.21-118.25 (bullish)
S&P Momentum (SPMO) 78.97-80.96 (bullish)
Healthcare (PINK) 29.83-30.93 (bullish)
BSE Sensex (India) 73,256-75,050 (bullish)
DAX 17,940-18,518 (bullish)
VIX 13.45-16.92 (neutral)
USD 104.06-106.11 (bullish)
EUR/USD 1.064-1.083 (bearish)
Oil (WTI) 83.56-87.72 (bullish)
Gold 2 (bullish)
Copper 4.08-4.45 (bullish)
Silver (SLV) 25.95-29.61 (bullish)
MSFT 418-431 (bullish)
AAPL 165-177 (bearish)
Bitcoin 67,007-71,998 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
