“Should we care about how new ideas begin?”
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”!
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)
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%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.
TODAY’S S&P 500 SET-UP – November 26, 2013
As we look at today's setup for the S&P 500, the range is 17 points or 0.58% downside to 1792 and 0.36% upside to 1809.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
THE MACAU METRO MONITOR, NOVEMBER 26, 2013
BOUYGUES TO BUILD FIFTH CITY OF DREAMS HOTEL Macau Business
Bouygues SA says subsidiary Dragages Macau Ltd has won a HK$3.68-billion (US$474 million) contract to build a luxury hotel in City of Dreams. Dragages Macau will put up a 39-storey building with about 151,000 square metres of floor space over the next three years. The hotel will have 783 rooms, including some in 10 villas, a casino, restaurants, conference rooms and a sky pool. MPEL has yet to say which chain will manage the hotel.
HK$24.6-MLN PAYDAY MACAU'S BIGGEST JACKPOT Macau Business
An unidentified Hong Kong gambler has claimed a HK$24.6 million (US$3.17 million) jackpot at Sands Cotai Central, which Sands China says is the biggest single jackpot won in Macau. The company says the player won a Fa Fa Fa Grand Jackpot while playing a Fortune King slot machine on November 17. Sands China says slot players have won more than HK$1 billion in its casinos since last month.
This note was originally published at 8am on November 12, 2013 for Hedgeye subscribers.
“Ignorance more frequently begets confidence than does knowledge; it is those who know little, not those who know much, who so positively assert that this or that…”
Having fun out there yet?
If like us, your conviction on what an appropriate gross and/or net exposure should be has wavered in recent weeks, Darwin’s quote probably resonates with you. With respect to financial markets, I, for one, don’t understand how anyone could’ve had enough conviction to positively assert anything beyond a simple “I don’t know” in recent weeks, but that’s just me. What do I know?
Without speculating on the level of ignorance (or lack thereof) implied by the views of any market participant(s), we continue to tip our hat to the “QE is effective; see, I nailed it all along” community – if for nothing other than their unwavering confidence.
Does QE actually “work”, however? Moreover, how does one go about determining its effectiveness? This debate really centers on the question we asked in the video we published earlier last week:
“Does the price of money determine the pace of economic activity or does the pace of economic activity determine the price of money?”
Without getting all philosophical before breakfast, our answer to that question was simply, “It’s reflexive.”
Considering, it would seem that trying to determine the causality behind the demonstrable acceleration in economic growth we’ve witnessed in the YTD is little more than a fool’s errand. Was QE responsible for producing economic growth or were expectations of QE’s eventual demise the stimulus the economy needed?
Sourcing the data, the reflexive relationship between the US dollar, US interest rates and the slope & magnitude of real GDP growth is almost impossible to disregard without being completely subjective or grossly qualitative. Whether you’re looking at the current economic cycle or the past three decades of economic cycles, the data speaks for itself:
To our knowledge, qualitative assertions have yet to trump basic arithmetic in any debate.
The more we reflect and debate internally as a team, the more we find ourselves squarely in the camp of: “Who cares about causality anyway?” As investors, all we really want to do is isolate the signals – be they quantitative or fundamental – that give us the best probability of being right on the slope of growth, inflation and/or policy.
From there, we can begin to speculate in financial markets using reasonably accurate assumptions for what we believe to be the three most important factors in determining asset prices.
With respect to financial markets, what matters most is what everyone thinks everyone else thinks about QE and the only way to record any consistency or accuracy in attempts to measure that is to set aside our own dogmas.
In short, we do not think it is helpful to engage in the debate surrounding the causal impact of QE upon the economy. In our view, it is impossible to determine causality without being qualitative or subjective because we don’t have accurate data about the expectations and intentions of all the agents that make up an economy.
As such, all we can really do as investors is interpret the signals as they come and play the ball as it lies. Focusing our attention on anything else is a clear deviation from the task at hand (i.e. making money).
Regarding the task at hand, we do know that QE and its associated expectations are causal to the prices of many assets globally. As such, the name of the game remains isolating the signals that give us the best forward-looking read on growth, inflation and/or policy – or the eventual tapering of said policy:
So what do investors do with all of these convoluted signals? In a phrase: #GetActive. If you’re not yet familiar with our call for active mangers to outperform over the both the intermediate term and long term, please ping us for a review of our 4Q13 Macro Themes.
Indeed, it would seem that stock-picking will become increasingly important as we start to move away from what has been an elongated period of minimal return dispersion at the sector level – likely due to the strong performance of typically low-beta, high-yielding sectors in an era of institutionalized yield chasing.
For those of you who are keen to add new techniques to your analytical toolkit, we’ve built a model that backtests exceptionally well in screening for prospective alpha at the single security level. For more on that, please CLICK HERE for the data and CLICK HERE for the accompanying manual. Email us if this is something you’d like to discuss further.
Our immediate-term Risk Ranges are now:
UST 10Y Yield 2.64-2.79% (bullish)
SPX 1748-1778 (bullish)
VIX 12.29-14.55 (bearish)
USD 80.93-81.53 (neutral)
Pound 1.58-1.60 (bullish)
Gold 1271-1312 (bearish)
Keep your head on a swivel,
Associate: Macro Team
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