This note was originally published at 8am on January 16, 2014 for Hedgeye subscribers.
“The task of the leader is to get his people from where they are to where they have not been.”
Where we are from a US stock market perspective is not that complicated. With the SP500 and Russell 2000 closing at 1848 and 1171, respectively yesterday, we are at all-time highs.
Yes, all-time is a long time. And, yes, when I say “we”, I’m not talking about them. While my views might rub them the wrong way sometimes (them being the other team, or the other side of the trade), that means I’m just doing my job. I don’t play for them.
The aforementioned quote comes from page 59 of Unusually Excellent. The chapter is called “Being Compelling – The Commitment To Winning.” In spite of my many human flaws and countless mistakes, that is my commitment to both you and my team.
Back to the Global Macro Grind…
Winning in this game (or in life for that matter) doesn’t start and end with feeling like we’re winning an argument. I personally have too many silent arguments in my head throughout a week to count – and if I’m not losing some of those, I’m not growing.
Arguing with the score of the game is harder to do than simply dismissing the other side of what you think. I just read an article about a hedge fund in Greenwich, CT that got smoked last year (and closed the fund). The head of the firm blamed a macro market that was “dislocated from fundamentals.” I guess that was easier than blaming himself.
This, of course, has been one of the best 13-14 month periods to be invested in “growth”, as an investment style factor, ever. Particularly if you are a macro guy (or gal) who was net long growth equities and short slow-growth yielding bonds (or stocks like Kinder Morgan (KMI), which missed last night, that look like bonds). #Fundamental, it was. Indeed.
But that is yesterday’s news…
Where we go today, tomorrow and the next day are places we have never been. My job is to help both you and my firm get there without having to make excuses for wrong turns along the way
So let’s start with what matters most about where we are – our position:
- CASH = 27%
- Foreign Currencies = 27% (we still like the Euro, Pound, Kiwi, etc.)
- International Equities = 20% (we still like most of Europe, especially Germany and the UK)
- US Equities = 18% (Tech, Healthcare, Financials, Industrials, and Materials)
- Commodities = 8% (Coffee, Cattle, Copper – and maybe some Gold)
- Fixed Income = 0%
Explaining 1-6 in reverse is pretty straightforward:
- Fixed Income 0% allocation for 184 days (73% of the time in last 12 months - net short via sovereigns, long corporates)
- CRB Commodities Index signaled don’t short last month – still a Bernanke Bubble that popped, but one we can risk manage
- US Equities is where we made a Sector Style Shift away from Consumption and Into Inflation (see Q1 Macro Themes deck)
- International Equities is the easiest to stick with because the slope of European #GrowthAccelerating is the most obvious
- Foreign Currencies will only be easy to stick with if EUR/USD and GBP/USD hold $1.35 and $1.63 TREND supports
- Cash, when you are knowingly buying-the-damn-bubble #BTDB in US Equities, is still King at my house
In order to expand on how we think about asset allocation, country and sector/style picking, etc. we do our Global Macro Themes deep dives. If you’d like to review that slide deck, ping us at Sales@Hedgeye.Com and you’ll see us refresh our risk management themes on our disruptor (to consensus TV) video platform @HedgeyeTV.
One of the videos our all-star offensive line analyst, Darius Dale, and I did this week walks through why we A) like Yen Down, Nikkei Up’s intermediate-term TREND, but B) wouldn’t be aggressive in allocating capital to Japanese Equities on pullbacks until we see some of our key lines of support (for the Nikkei) and resistance (for the Yen vs USD) confirm.
Here’s the video link.
Where we are from an immediate-term TRADE perspective sometimes deviates from our intermediate-term TREND views. That’s just the way markets (and life) work. Why else would I subject myself to getting up at this un-godly hour to hand bomb immediate-term TRADE lines in my notebook?
The alternative to being committed to winning is accepting mediocrity. The Manifestation of Mediocrity in America is something I think I could write a book about. So I’ll end that prickly point with a period. Because, to get a certain kind of person from where they are to somewhere better, sometimes feels like just that. Capitalizing on their frustration wins too.
Our immediate-term Global Macro Risk Ranges are now (TREND in brackets):
UST 10yr Yield 2.79-2.92% (bullish)
SPX 1835-1852 (bullish)
VIX 11.84-13.35 (bearish)
USD 80.74-81.31 (neutral)
Brent 106.12-108.66 (bearish)
Gold 1233-1268 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer