Being Good

This note was originally published at 8am on June 12, 2013 for Hedgeye subscribers.

“I am not remotely interested in just being good.”

-Vince Lombardi

If you can’t tell I like winning, you probably haven’t met me yet. I think I hate losing more than I love winning. The only way not to be average in this game is to play on a great team. I am not remotely interested in just playing on a good one.

What makes a good analyst? What makes a bad one? What makes an average PM? What makes a great one? After playing on 3 big buy-side teams, then building my own here while we collaborate with client teams, I can tell you that greatness in this profession comes down to one very basic thing – having a repeatable, but flexible, process.

Once you have that – you have to do what Lombardi did. You have to find it within you to lead your teammates to believe in both the process and themselves. I’ve had the privilege of playing on a championship team on the ice. When individuals find a way to put the collective goal above themselves, you have an opportunity to drink from the cup.

Back to the Global Macro Grind…

It’s not cocky, arrogant, or whatever else someone who just wants to be good thinks you are when you get up every morning and tell them you are going to beat them. For some of us, that’s just the goal. Expecting to win is a culture – don’t apologize for it.

I was on the New York CFA Society’s Big Data panel for a 2 hour debate last night in NYC. The panel was a typical mix between academia, industry, and market practitioners. One academic guy was from Morgan Stanley. One industry guy was from IBM.

Harry Blount (CEO of Discern) was moderating the panel. He’s a former sell-side analyst building an independent research firm and he gets the game. He asked us to A) define Big Data and B) explain how we use it.

For me, this was a relatively easy exercise. Building, evolving, and explaining my multi-factor, multi-duration approach to real-time risk management is what I do. For some of the academic guys in the room, it was very difficult to understand what I was saying – primarily because they don’t do what I do.

What is it that you do?

That’s how I ended the book Rich Blake and I wrote about the early stages of my hedge fund career. For those of you who have read the book, you know that I have a lot of issues. Most humans do. It’s just hard to put those flaws on paper.

My career has been good, not great. And I don’t want it to end that way. That’s why I ended the book with what I go to bed with and wake up to every morning of my market life – questions...

And, oh do I have a lot of big ones in my notebook this morning:

1. What if the US Dollar snaps my intermediate-term TREND line of $81.21?
2. What if the USD/YEN cross breaks down through 95.85 TREND support?
3. What if the SP500 continues to signal a series of lower-highs versus her all-time high of 1669?
4. What if the VIX continues to signal a series of intermediate-term higher-lows?
5. What if Tim Tebow wins a Championship with Belichick?

That last question found its way into my notebook after I saw the headline in the New York Daily News this morning “God Help Us!” Losers question champions. That’s fine. That is what they do. And what we want to do is answer the bell come game time.

I am not interested in being labeled a perma bull or perma bear. I am not interested in what the tired aristocracy of the Old Wall thinks about my style either. To win championships as a Global Macro Strategy team, we need to focus on results.

Being right requires being flexible. When the quantitative TREND signals change, we need to start questioning our positions. When the signals are head-fakes, we need to remove all confirmation bias from the research and make a call on that and timestamp it too.

This will change, but for now, if you want to get Global Equities right, you have to get the US Dollar right:

1. Intermediate-term TREND correlation between USD and SPY on a 6 month duration = +0.84
2. Intermediate-term TREND correlation between USD and EuroStoxx600 (6mths) = +0.81
3. Intermediate-term TREND correlation between USD and Emerging Markets (6mths) = -0.54

Fortunately, this has been the upshot of our Global Macro Themes for the last 6 months. As the US Dollar A) stabilized then strengthened from its 40 year low and then B) broke out across longer-term durations = good for US and European stocks = bad for Emerging Market stocks (the aforementioned inverse correlation is to the MSCI EM Index).

So, what if the US Dollar starts to break-down from a TREND perspective? What happens if Bernanke doesn’t “taper” as the bond market now expects him to in September? What happens if the Japanese completely screw this up faster, instead of slower?

Anything can happen out there. That’s why I think Belichick likes Tebow inasmuch as I like hiring players who have the intangibles that I cannot teach. To be the change in strategy, I need players who are disciplined but flexible – and who expect to win.

What am I going to do with this leadership rant and all these questions today?

1. Let Mr Market answer them for me
2. If he answers the questions faster, I’ll move faster
3. If he answers the questions slowly, I’ll take my time

Managing risk, slow and fast – that’s what great players in this game do. If you just want to be good at this, don’t be flexible. It’s a lot less work and your day will be a heck of a lot less introspective. I am not remotely interested in promising you certainty.

Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Nikkei, and the SP500 are now $1362-1411, $100.28-105.09, 80.79-82.36, 95.85-99.53, 2.14-2.23%, 14.84-17.98, 12,603-13,815, and 1607-1658, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer