“You are on your own and you must take ownership of your own destiny.”
No, that wasn’t the new marketing pitch from President Obama. That’s from one of Scotland’s finest – the one and only Hugh Hendry. He runs Eclectica Asset Management.
Eclectica isn’t a word that spell-checks on this word processor – that’s why you just have to love the name. This guy couldn’t give 2 deflated Canadian copper cents about what other people think about him and/or his Global Macro process.
“For me, this has always meant being detached from the sell-side community. It is not a question of respect, it is just that I prefer not to engage in their perpetual dialogue of determining where the “flow” is. I cannot be reached by telephone… not one buddy, not one phone call, not one instant message. I am not seeking that kind of “edge”…” (Manager Commentary, April 2012)
Back to the Global Macro Grind…
What’s our edge? Math.
Every single Global Macro thought, theme, and position we consider putting our name on is driven by what the market tells us. We don’t tell the market what to think. We aren’t that “smart.” The market tells us.
When I started in the hedge fund business in 1998, “smart” meant something that’s a lot different than what it means today. Smart is as performance does. It doesn’t mean coming up with a “value” idea, pitching it to all your favorite “smart” friends (after you bought it), getting them to buy it, and then promoting it on TV.
Modern Global Macro Risk Management (i.e. post 2007) uses computers. I hear a lot of whining about this – “it’s the machines”… I mean get real already. If it’s the machines, hire more super smart people to build better machines to front run the other machines.
Yep, I just wrote that. And I can because A) I don’t run a prop desk B) I don’t run a bank and C) I don’t run a broker-dealer. Front-running the machines is simply having a repeatable math-based decision making process that keeps you 1, 2, and hallelujah if it’s 3 steps ahead of the smartest guys/gals in the room.
In other words, understand what the other machines will act on, and act ahead of their most probable behaviors. If someone legitimately believes that the 50-day Moving Monkey is a risk management process, great. Let them – and more importantly, don’t interrupt them while they get whipped around by it.
Been there, done that.
I saw (I don’t hear, I use Twitter) more “flow” yesterday about the 50-day moving average being “intact” (it’s at 1335) than just about anything that was flowing into yesterday’s market close.
What, precisely, does that mean to people? Do they actually run other people’s money using a 1-factor simple moving average that my 4-year old son could replicate with his iPad and bang out conclusions on any ticker I give him?
That’s the biggest risk to our profession. The simple reality is that, since 2007, a lot of people have not changed what it is that they do. That’s sad and exciting. Sad because sad is as sad does; exciting because it provides for creative destruction – the guts of what we do.
What’s our edge?
Like I said, it’s math. And what I mean by that is that I am constantly re-modeling a baseline 3-factor model with dynamic price, volume, and volatility data across 3 core durations (TRADE, TREND, and TAIL).
Currently, looking at the SP500 for example, here’s what I see:
- Intermediate-term TREND resistance overhead (that’s bearish) at 1365
- Immediate-term TRADE support below last price (that’s bullish) at 1333
- An intermediate-term risk management range of 1
We’re Duration Agnostic. So you tell me what the duration of your risk is, and we’ll tell you what the risk of the range within your duration is. This gives us a very simplified edge that is our own. Our edge is making decisions at the highest probability points within our defined duration and range. It doesn’t mean we are always right; it means we don’t swing at outside pitches.
Our edge is by no means easy to derive. I have a team of 27 analysts constantly pumping me with quantitative inputs that I can add and/or subtract from our models. Constantly re-modeling; constantly changing – that is what I do. And I’m very humbled by the idea that I can attempt to explain our edge to you each and every day. Being held accountable to our process can only make us better.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $98.24-103.01, $82.61-83.96, $1.21-1.24, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Earlier today, the Hedgeye Macro Team, led by CEO, Keith McCullough, and DOR, Daryl Jones, hosted our 3Q12 Macro Themes Call.
- Growth Slowing's Slope - Our fundamental view is that growth will come in lower than expectations across a collection of major economies - including the U.S. We refute the notion of the U.S. decoupling and will present the main indicators that signal a higher probability of equities crashing from here.
- The Cliff - We analyze the assumptions embedded in consensus/CBO forecasts regarding the "fiscal cliff" and offer our view on how heightening uncertainty regarding this event should impact global financial markets. Further, we discuss the question: will slower domestic growth pull forward the debt ceiling debate and introduce uncertainty on a fiscal cliff resolution?
- Obama vs Romney - As elections approach we evaluate the policy impact on the broader economy based on the victor. Could the U.S. look more like Europe if Obama wins? And what asset classes stand to outperform based on the next president?
To access the presentation materials, please click on the following link: "Q3 MACRO THEMES AND PRESENTATION".
To access the replay podcast, please copy/paste the following link into the URL of your browser: https://app.hedgeye.com/feed_items/21258-q3-macro-themes. NOTE: You must be logged into www.hedgeye.com for complete access. Email email@example.com if you require a refreshed password.
Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.
The Hedgeye Macro Team
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Athletic Footwear and Apparel sales accelerated into the first week of July. The month started off strong, on top of tough compares last year. Starting next week, both apparel and footwear yy comparisons become significantly more favorable. Underlying fundamentals would need to seriously erode in order to show disappointing headline results for the duration of the summer.
Philippines opportunity underappreciated by investors
- Details are scarce but we think MPEL will invest between US$300-580 million and procure a management fee
- The phase one construction cost may be around US$700 million with any additional hotel towers/amenities likely funded almost exclusively by MPEL
- As can be seen from the chart, MPEL generates positive shareholder value if the project generates EBITDA north of $125 million. Resorts World Manila – the only existing integrated casino resort in the Philippines – generates annualized EBITDA over US$300 million.
“Under capitalism, man exploits man, under communism, it’s just the opposite.” –John Kenneth Galbraith
Inflation trades are over. Bubbles will continue to pop.
Growth Slowing: It’s about getting the slope of growth right. Get that right, you get a lot of other things right. People need to see growth. Short industrials since March 12.
The question is: are you bearish enough on growth?
Why not $60 oil? Brent bearish against all 3 durations. USD Index to 90s? Highly unlikely. Keith thinks it could happen. At $60 oil, I’ll be really bullish.
SPX hasn’t broken 1286 tail line. If you break 1286, you goto the 1100 line and get really bearish. Trade the range up to 1365.
Gold is on life support. Is the Fed out of bullets? We need to know the answer to this question. Gold is addicted to quantitative easing and expectations. If the USD Index continues higher, watch out for $1100 gold. A lot of hedge funds are caught up in gold and the GLD ETF and it does not bode well for them.
The Fiscal Cliff has two parts. Spending cuts and tax hikes have perpetuated The Cliff. Politicians manage career risk for themselves.
The US debt growth will increase if The Cliff is resolved poorly. If the can is kicked down the road, US will look like France. Congress needs to avoid massive tax increases, negotiate another debt ceiling compromise. Good luck with that.
Get rid of Bernanke, you’ll see stocks rip. Definitely not priced in that Romney could win the presidency. Obama separating himself from Bernanke could win him the election. Not likely, though.
More debt will not bring growth. They need to get a handle on things in Europe. We’re very low with the EUR/USD now. It could even go to parity.
LIE-BOR will disrupt the entire industry.
If you’d like access to this morning’s Q3 Big Macro Themes call, please email sales@Hedgeye.com.
Risk Managed Long Term Investing for Pros
Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.