This note was originally published at 8am on August 19, 2013 for Hedgeye subscribers.
“I think I’m different. I’ve got alpha, baby.”
That’s a quote from Andy Kessler’s foreword to the latest book that has surfaced to the top of my reading pile, Knowledge and Power, by “techno-utopian intellectual” (per Wikipedia), George Gilder.
“Everyone says that, of course, but most investors are all beta… when markets go up the beta warriors outperform, and when markets go down they get killed.” (Knowledge and Power, pg xii)
That sounds about right. If you want to see what the getting “killed” part looks like, check out the 2013 YTD returns of PMs who levered themselves up long of the bond market as it was traversing its all-time bubble highs.
Back to the Global Macro Grind…
As a macro risk manager, most of your alpha is generated by not being long the stuff that is getting killed. From January to July, that meant not being long Gold, Silver, etc. Since May/June, that’s meant being out of Bunds, Gilts, and Treasuries.
No, we don’t have to wake up every morning and nail every tick in Apple (AAPL) to help you generate risk-adjusted alpha. Our primary risk management focus has always been aligned with Buffett’s 1st rule of investing – “Don’t lose money.”
I think I’m different because I’ve got the ability to cut an asset allocation to 0%. #OldWall banks and broker dealers won’t opt for that strategy because they need to support their new issue markets. Rule #1 (for them) is more like ABS (always be selling).
We have a 0% asset allocation right now to Fixed Income because it’s the 1st time we’ve ever had 2 of our top 3 Global Macro risk management themes focused squarely (and bearishly) on bonds:
- #RatesRising (http://app.hedgeye.com/media/595-ratesrising-q3-macro-theme-1)
- #DebtDeflation (http://app.hedgeye.com/media/597-debtdeflation-q3-macro-theme-2)
Since these are Q313 themes and the quarter is almost half over now, we’ve re-produced these themes with our new @HedgeyeTV videos (links attached) in order to re-communicate our strongest slides on the subject matter.
The latest addition to our senior research team, Director of Financials Research, Jonathan Casteleyn, also has a video up on the front page of our site titled “Bond Bear Market: Just Beginning.” So we think we’re being pretty clear on our view here.
So far, in July-August, Mr. Market agrees. Month-over-month, look at what’s happened to 3 major sovereign debts:
- US 10yr Treasury Yield = +36 basis points (+14%) to 2.85%
- Germany’s 10yr Bund Yield = +38 basis points (+25%) to 1.90%
- UK 10yr Gilt Yields = +43 basis points (+19%) to 2.70%
So, US stocks finally having a down-week for once notwithstanding, this is where the real negative alpha is eating into the standard #OldWall pie of asset allocations – via #DebtDeflation.
The economic data in the 3 aforementioned countries supports #RatesRising. Germany’s data has improved, sequentially, for the past few months and the UK’s data has been nothing short of fantastic relative to both absolute levels of years past and market expectations. In the USA, jobless claims shocking to the upside drove last week’s +25 basis point week-over-week move too.
Now that the SP500 has corrected -3.2% from its all-time closing high of 1709 in the first week of August, we have to ask ourselves (as we have many times this year) if we A) buy the equities dip or B) join the long list of #PTCs (professional top callers) who have had issues understanding that this is a growth investors market.
If you have a 0% asset allocation to US Fixed Income, your job gets a little less complex. If you just have to break-down the US Equity pieces of the Sector Style Factor pie, you’ll note that the slow-growth sectors still look the worst, especially for the month of August to-date:
- Utilities (XLU) lead losers at -4.4% MTD
- Healthcare (XLV) is -3.2% MTD
- Consumer Staples (XLP) is -2.7% MTD
In other words, with the SP500 -1.77% MTD, being “overweight” those slow-growth sectors is also a negative alpha position relative to something that’s growthier, like Tech (XLK), which is +0.3% for August to-date.
Don’t get me wrong, there are plenty of things out there that concern me about being long US growth equities. There always will be. But the market A) doesn’t care about my concerns and B) is a lot more concerned with the bubbles that are popping in anything fixed income and/or Yield Chasing that Bernanke #force-Fed people into over the last 5 years.
Getting out of the way of Bernanke’s Bubbles as they are popping – it’s the new alpha, baby!
Our immediate-term Risk Ranges are now:
UST 10yr 2.67-2.86%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer