This note was originally published October 19, 2012 at 07:32 in Early Look
“What defined a good scout? Finding out information that other people can’t.”
I was eating a delicious lobster roll on a pier in Camden, Maine yesterday and all of a sudden my iPhone went batty. The market went from straight up, to straight down. Google was “halted.”
So, I jogged back up to my hotel room, fired up my machines, ran GOOG through my quantitative screens – and there it was – someone knew something! Someone always does. They don’t always get caught.
Most people in this business are honest, hard working and intelligent enough to not take on orange jump suit risk when they buy or sell securities. But some people are so “smart” they are stupid. This isn’t baseball. “Finding out information that other people can’t”, in many cases, is illegal. That’s why we have to continuously evolve our analytical processes so that we can win more than we lose.
Back to the Global Macro Grind…
The aforementioned quotes come from another excellent chapter in Nate Silver’s The Signal And The Noise, “All I Care About is W’s and L’s.” Silver has credibility because he built (and sold) a projection system for baseball called PECOTA. The chapter’s title is a quote from the “not physically gifted” Dustin Pedroia of the Boston Red Sox – a player that PECOTA screened as a stud when scouts disagreed.
That’s where you really win in this game – when you make a bet on a stock, commodity, bond, etc. that sits outside of consensus. This doesn’t just happen. Scouting for ideas requires a fast and flexible process. If you are doing it legally, it’s a grind. “Billy Beane, the protagonist of Moneyball, sees relentless information gathering as the secret to good scouting.” (page 99)
As you build your team, machines, and processes, it actually gets harder as you achieve success. People who cut corners and cheat don’t want you to win. They’ll do whatever it takes to take you down. So, you have to be resilient. As Silver reminds us, the real lesson of Moneyball is that Beane “was very threatening to people in the game; it seemed to imply that their jobs and livelihoods were at stake.”
Here’s what our multi-factor, multi-duration, research and risk management process is telling me this morning:
- US Dollar Index held its long-term TAIL line of $78.11 support
- Euro (EUR/USD) failed, again, at its long-term TAIL risk line of $1.316 resistance
- US Treasury Yield (10yr) made another lower-high vs the SEP high of 1.89%
- SP500 made a lower-high on accelerating volume (on yesterday’s down move) vs SEP’s 1474 high
- Russell 2000 continues to make a series of lower-highs versus the 846 closing high of March 2012
- US Equity Volatility (VIX) continues to make higher long-term lows, holding 14.22 TAIL risk support
- Technology Stocks (XLK) have gone from the market’s top performer to its worst (down -2.8% OCT)
- Financial Stocks (XLF) are immediate-term TRADE overbought, leading what’s left of the market’s gainers
- Chinese Stocks (Shanghai Comp) failed to show any follow through at its 2141 TREND line overnight
- European Stocks are making lower-highs, across the board, versus their SEP closing highs (7451 DAX)
- Commodities (CRB Index) remain a bubble that’s popping; TAIL risk line for CRB = 312
- Gold failed to overcome its immediate-term TRADE line of 1761 resistance yesterday on green
- Copper, down -1.1% this morning, failed, again, at TRADE ($3.76) and TAIL ($3.95) resistance
I’ll stop there. These are both quantitative signals and noise (they both matter). And stopping on lucky 13 on the anniversary of 1987’s Black Monday is just me being cute. So is the storytelling that “everyone is bearish and you have to buy stocks because they are up YTD.” After a -23% down day on October 19th of 1987, the market still “closed up YTD” too.
On the research side (very different than the quantitative side of what we do, but critically complimentary), here’s what’s new this morning:
- Microsoft (MSFT) joins IBM, INTC, and GOOG as just one more example of growth and #EarningsSlowing
- Chinese Foreign Investment (FDI) dropped -6.8% y/y in SEP (vs -1.4% AUG), the 10th month of outflows in the last 11
- Federal Reserve Balance Sheet assets of $2.849 TRILLION is actually falling (slope) y/y at this point by -$6.6B this wk
Slapping all 16 of those pieces of Hedgeye Scouting Information onto my notebook this morning doesn’t make me particularly bullish on anything other than buying US Dollars and bonds. Why pretend to be smarter than the market when the market can tell me when not to swing at outside pitches?
One by one, they’re picking off the bad guys in this business. Using steroids to juice returns is no longer cool. As Nate Silver writes at the end of chapter 3, “in the most competitive industries, like sports, the best forecasters must constantly innovate…. The key is to develop tools and habits so that you are more often looking for ideas and information in the right places.” (page 106)
It’s October. The good news is it’s a cleaner game than it was 5 years ago and they don’t have Candy or replacement umps. Batter up!
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, GOOG, and the SP500 are now $1731-1751, $111.71-113.54, $79.02-79.82, $1.29-1.31, 1.74-1.82%, $687-731, and 1444-1468, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer