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“Should we care about how new ideas begin?”

-Jon Gertner

That’s a very basic question Jon Gertner asks at the beginning of a book I’ve been grinding through as of late – The Idea Factory: Bell Labs and the Great Age of American Innovation.

The story of innovation at Bell Labs is better than the book. It’s a uniquely American story that most entrepreneurs, innovators, and patriots can associate with. It’s all about the struggle, the wins, and the losses. The boys at Bell Labs (yes, they were all boys) shared a culture of learning and evolution. They weren’t afraid to make mistakes.

There was a little bit of everyone in their ranks. “Kelly, Fisk, Shockley, Shannon, Pierce, and Baker. Some of these names are notorious – Shockley won the Nobel Prize in Physics in 1956… in Shannon’s case, it was mathematics and artificial intelligence, while remaining largely unknown by the public…” (Gertner). A multi-factor approach perpetuated their growth.

Back to the Global Macro Grind

We’re trying to build that culture of learning both internally (working as a team) and externally (collaborating with clients). We don’t have any Nobel laureates on staff, but we do allow the lowest level IQs (hockey players like me) to contribute.

Do we care how new ideas begin? Nope. Not at all. Mr. Macro Market decides that for us. Our research process is grounded in the uncertainty of it all. That’s what makes it so exciting. We are humble observers of time and space.

This, as I pointed out earlier, isn’t a new style of thinking. Per Gertner, to a degree Thomas Edison made it cool at Bell Labs too. On ideas, “…how they worked was to Edison less important… he read compulsively… he scorned talk about scientific theory…” (pg 12). Imagine Edison had to deal with Keynesian “economists”!

Moving along…

A few weeks ago (November 14th) I wrote an Early Look titled “A New Idea”, so I’m going to go back to milking that cow this morning (plural title) with my “everyone’s a winner” position at Mr. Macro Market’s centrally-infected casino.

To review, I have my market bets spread across the macro table:

1. CASH = 44% (need lots of cash in case this sucker implodes)

2. FX = 24% (lots of alpha to be generated on the other side of the USA Burning The Buck)

3. INTERNATIONAL EQUITIES = 8% (some of these markets love Down Dollar)

4. US EQUITIES = 8% (the variance of US Sector Returns is testing all-time lows)

5. COMMODITIES = 8% (we’re still rolling the bones on Gold)

6. FIXED INCOME = 8% (no-taper in DEC is a big Bond Bull Lobby @PIMCO wants)

Crazy Eights!

And, again… to be clear, I realize that in some cases I am buying-the-damn-bubble #BTDB (both former ones like Gold and Bonds, and news ones like US stocks) here. But what do I care about the “why” on these new ideas anyway?

The #OldWall idea of trying to call tops has rendered itself useless. They are processes, not points.

Looking at the all-time-bubble-highs in US stocks, what is signaling caution?

1. VOLUME – vs its TREND, US Equity volumes have tracked down -11% and -14%, respectively, at the last 2 closing highs

2. VOLATILITY - front month VIX has been making higher-lows as SPX tracks higher-highs on falling volume

3. BREADTH – at the closing high (Russell2000 = 1124) yesterday’s breadth was negative (more decliners than gainers)

Does that mean we can all jump up and down @Hedgeye headquarters today and call “the top”? Nope. It means what it means. With “it” usually meaning something new.

On the other side of the caution signs, there are plenty green lights:

1. EQUITY FLOWS – US Equity fund INFLOWS are trending at fresh YTD highs

2. BOND FLOWS – US Bond Fund OUTFLOWS are trending at fresh YTD highs

3. TRADE and TREND SIGNALS – for SPX, RUT and NASDAQ remain bullish

So what matters more, internal market signals or external flows? I don’t know, yet. But I am certain that Mr. Macro Market will decide, and not me. That’s not a new idea either.

Neither is buying on red and selling on green. So in between now and whenever whatever this is ends, within our immediate-term risk ranges for stocks, bonds, commodities, and currencies, we’ll just keep doing more of that. Keep moving out there.

Our immediate-term Global Macro Risk Ranges are now as follows:

UST 10yr Yield 2.69-2.81%

SPX 1

VIX 11.85-13.62

USD 80.61-81.29

Brent 108.81-111.63

Gold 1

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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