This note was originally published at 8am on July 09, 2014 for Hedgeye subscribers.
“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”
Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.
Back to the Global Macro Grind…
Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.
Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.
I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!
In our Q3 Macro Themes presentation on Friday (11AM EST, ping sales@Hedgeye.com for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:
- Fixed Income Volatility at generational lows
- Foreign Currency Volatility at all-time lows
- Commodity Volatility at cycle-lows
Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).
Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.
The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).
In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”
So, don’t be average. Fade beta.
#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.
We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.
What is the turn?
- When our immediate-term TRADE momentum signal exhausts itself to the upside…
- Then you get a sharp move off that high, on accelerating volume and rising volatility…
- Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND
Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.
You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.
I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now:
UST 10yr Yield 2.49-2.60% (bearish = bullish on bonds)
SPX 1949-1985 (bullish)
RUT 1167-1190 (bearish)
BSE Sensex 25260-26189 (bullish)
VIX 10.32-12.69 (neutral)
USD 79.73-80.37 (bearish)
Pound 1.70-1.72 (bullish)
WTIC Oil 102.63-104.99 (bullish)
Natural Gas 4.17-4.39 (bearish)
Gold 1312-1331 (bullish)
Copper 3.20-3.30 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer