This note was originally published
at 8am on April 25, 2012.
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“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)
I continue to be fascinated by the groupthink that permeates our profession. You’d think that after all that we have been through in the last 5 years, that would have changed as the facts have. Nope.
I’m not talking about Apple. I don’t have the “edge” on that stock that the 58 sell-siders who follow it purport to have. Legitimate “edge” on a stock like that would probably raise one’s risk to wind up wearing an orange jump suit anyway.
I’m talking about the Wide Acceptances we’ve seen in 2012. From Europe is “fine now” (right before Spain started to crash, again) to “Dow 15,000” (cover of Barrons in February right as Global Growth started slowing, again). Fascinating. As a Risk Manager, you shouldn’t be tasked with chasing returns. You should be tasked with disproving every widely accepted thesis impacting your P&L.
Back to the Global Macro Grind…
One of the most widely accepted one-liners from the media and sell-side this week has been some version of a Most Read (Bloomberg) headline this morning: “US Stocks Rise Amid Better Than Forecasted Earnings.”
That, of course, is nonsense. Generally speaking, stocks have been falling during this earnings season. Sure, some stocks have risen on better than expected results, but some have been getting tattooed on inline to worse results versus buy-side expectations.
The key to what I just wrote is “buy-side expectations.”
For as long as I’ve been on the buy-side of this game (since 2000), I can’t remember a time when the game wasn’t gaming the game of buy-side expectations.
The sell-side consensus that pundits refer to on “beating expectations” is just a backboard that buy-side pros play against. Consider AAPL expectations: you get multiple sell-side firms slap $1000 price targets on AAPL into March quarter end; the buy-side proceeds to sell stock into that for a -12% AAPL drawdown from April 9th-24th; and presto, the stock is up +9% on an “earnings beat.”
Obviously if AAPL wasn’t going to “beat” the sell-side’s actuall earnings expectations, the US stock market would be crashing this morning. So, we averted one of those. Nice.
Another way to think about a Wide Acceptance of an event or Storytelling line of consensus from the sell-side (the media has no choice but to use them as their research “source”) is to use that event as an opportunity to Fade Beta.
What does Fade Beta mean?
It means that if the market is up or down (beta), allegedly, on a widely accepted idea that has no proof of validity you either:
- Buy on red
- Sell on green
I know. That’s some really complex stuff…
Here’s an example of how a Global Macro investor considers Fading Beta today. Start with simple questions:
- Does Apple’s beat mean Growth is no longer Slowing, globally?
- Will Apple’s quarter inspire Ben Bernanke to move to iQe4 at his 215PM FOMC speech?
- What are Global Macro market prices telling us about questions 1 and 2 in real-time?
The beauty of our process is that A) we built it ourselves B) it’s repeatable and C) there are specific answers to question #3:
- Hong Kong, South Korea, and India’s stock markets all closed DOWN by the end of the session = #GrowthSlowing
- Hong Kong’s Export report for March came in at a startling -6.8% y/y = leading indicator for Global Growth
- Singapore’s Export report for March came in at a almost-as-startling -4.3% y/y = nasty
- Chinese stocks closed up +0.75% and we think they really work during a Deflating The Inflation (ie no iQe4 from Bernanke)
- UK GDP missed and moves back into the official “recession” zone of -0.2% for Q1 = #GrowthSlowing
- UK stocks (FTSE) have reversed their early morning Apple gains, barely up on the day
- Spanish stocks (IBEX) lead the short-term squeeze rally in Europe (after crashing, again) = low quality signal for bulls
- German Stocks (DAX) are up, but need to recover and sustain intermediate-term TREND support of 6688 to be bullish
- European bond yields don’t seem to care, at all, about iStuff
- Latin American debt, currency, and interest rate risk continues to accelerate in Mexico, Argentina, and Venezuela
- Oil prices are pushing higher = the #1 factor in our model for continued #GrowthSlowing, globally
- Copper is up small (+0.6%) and remains in a Bearish Formation (bearish across all 3 risk management durations)
- Gold is down, again, implying to me that the answer to Question #2 is a no today (Gold goes up when Bernanke devalues)
- Treasuries couldn’t care less about the US Equity Futures move; 10yr yields remain in a Bearish Formation at 1.98%
- US Treasury Yield Spread (10yr minus 2yr) remains 17bps below where it was when Growth Slowing wasn’t consensus
Sure, I picked all of the factors that are bearish signals, on the margin, relative to widely accepted storytelling that suggests otherwise. That’s the point. That’s what I do. I don’t change what I do based on what other people are forced to do.
In other news, Donald Trump is going after Scottish Parliament in Edinburgh today for proposing to fire up a wind farm near the ole Don’s latest golf course project. Wide Acceptance from The Scottish People to Mr. Trump’s self-interested whining is not expected.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index and the SP500 are now $1627-1655, $118.51-121.60, $79.01-79.46, and 1361-1392, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer