“There is nothing quite like ignorance combined with a driving need to succeed to force rapid learning.”
With three kids, I’d say that quote pretty much sums up my life right now. It’s also the opening line to chapter 3 of the book I have my nose in these days – Creativity Inc., by one of the founders and leaders at Pixar Animation Studios, Ed Catmull.
When it comes to the market side of my life, it isn’t what it used to be. I have the dubious task of running both my mouth and a company. On the latter, I can assure you that there is no driving force greater than owning it. If Hedgeye isn’t constantly evolving, we’re failing. And that’s not an option.
We’ve built both the risk management process and firm on the same principles. We wake up every morning with our eyes wide open to the reality that we do not know what is going to happen next. Embracing uncertainty forces rapid learning. And we like that.
Back to the Global Macro Grind…
If all you did at the start of last week was get rid of the most consensus short position on the planet (short SPX Index + E-minis), and focused on expressing slow-growth #YieldChasing where at least 66% of hedge funds out there haven’t yet, you’d have liked that too.
With the net SHORT position (CFTC non-commercial futures and options contracts) in the SP500 dropping week-over-week from -114,248 contracts (1yr high) to a net SHORT position of -57,737 this morning, I still wouldn’t be using that consensus “hedge.” Use the Russell.
What is the Russell?
- The Russell 2000 is a much purer read-through on US domestic growth than the multinational Dow or SP500
- The Russell 2000 (IWM) was down -0.5% in an “up tape” on Friday (SPX closed +0.18% at an all-time bubble high)
- The Russell 2000 is down -6.1% from its March 2014 high and -2.5% YTD
The alternative to being levered long US growth and/or social bubble stocks (i.e. the alternative to being down YTD) is:
- Being long #InflationAccelerating (CRB Commodities and Food Indexes are +9% and +22% YTD, respectively)
- Being long slow-growth via the long bond (10yr yield down another -6bps last wk and -55bps YTD at 2.48%)
- Being long anything US Equity #YieldChasing that looks like a bond (Utilities up another +2.3% last wk = +12.6% YTD)
“So” why bang your head against the #OldWall shorting spooos and trying to pick no-volume-v-bottoms in bubble stocks that blew up in March-April, when you can just keep doing more of what’s been a relatively low volatility position to keep?
A: it’s not consensus (yet)
No worries though, as time, price, and economic data change, consensus futures/options positioning changes:
- SPX Index + E-mini net SHORT position of -57,737 contracts today (vs. -19,488 net SHORT 3 month avg)
- 10YR US Treasury bond net LONG position of +22,876 contracts (vs. -59,080 net SHORT 3 month avg)
- Gold net LONG position of 68,393 contracts (vs. +103,404 net LONG 3 months ago)
In other words, 3 months ago (on March 1st):
- Hedge funds started getting short the consensus SPX hedge (after the JAN-FEB drawdown in the SP500)
- Consensus still didn’t think bond yields could go down in 2014 (so the 10yr yield crashed)
- And consensus momentum players chased being long Gold at $1350
Nothing forces rapid learning faster than doing precisely the same thing (at the same time) as thousands of other money managers and getting plugged.
But please don’t confuse consensus getting whipped around in an oversupplied asset management industry with the US or global economy. They are nowhere in the area code of the same thing.
And I suspect there will be nothing normal about the next three months in global macro risk management either. So have another coffee. It’s Monday June 2nd (Happy Birthday Dad!). Prepare to embrace the uncertainty of what tomorrow will inevitably bring.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.51%
WTIC Oil 102.19-104.95
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer