This note was originally published at 8am on November 07, 2014 for Hedgeye subscribers.
“Today you are you! That is truer than true! There is no one alive who is you-er than you!”
On this day in 2007, my first of three children, John Henry McCullough (we call him Jack) was born. It was the most humbling, yet inspirational moment of my life. While he won’t quite get what that means until he reads this many years from now – I’ll give him a big hug when he wakes up this morning and thank him for it anyway.
At the time, I thought Jack inspired me to say goodbye to a life in the hedge fund business that was very good to me. Little did I know that my goodbye (to the head hunter community) was more like a “top of the risk management morn” hello to all of you.
So I just wanted to thank all of you this morning too. I started building this company 7 years ago with only 1 thing in mind – being true to who I am. To do that, I could only build alongside teammates and business partners who share the same principles and purpose. While we may not get everything right, today I can still say that we are who we are, truer than true.
Back to the Global Macro Grind…
Today is also my bubble’s birthday. Shortly after Jack was born, the US stock market #bubble of 2007 stopped going up. It actually started to go down fast, closing down 6.6% in November of that year – and didn’t bottom for 16 months after that.
Today’s all-time #bubble high in the SP500 is approximately +30% higher than that one was…
And while I haven’t been explicitly bearish on the SP500 this year (my focus has been much more on the small/mid cap illiquidity #bubble that was the Russell 2000, which is still -3.1% from its all time high), I’m obviously getting there!
What a long, strange, but thoroughly enjoyable trip…
What’s the same between now and November of 2007?
- They were both all-time SPY highs – and in both cases, all-time was/is a very long time
- As we hit all-time highs, in both cases, both local and global growth was already slowing
- In both cases, there were/are a myriad of “it’s different this time” perma bull cases being made
Away from that – this day of November 2014 versus that in 2007 are entirely different.
- This time, every major central planning agency considers itself some version of a gravity bending god
- There are fewer hedge funds that are actually hedged for a crash (hedge fund correlation to SP500 beta = +0.9)
- Where I am most bearish (Russell 2000), this market is way more expensive (55x trailing earnings) and illiquid
I’m also grayer and fatter, but you already know that.
What we don’t know now is similar to what they didn’t know then (with they being those who bought them at the all-time high). There is a buyer and seller at every cost basis don’t forget.
I am the way I am, partly because I am a Canadian hockey player, but largely because I’ve never lost money in a down US stock market (2000, 2001, 2002, 2008).
While I think I was as bullish as anyone on small/mid cap US growth stocks in both 2009 and 2013, but I’m definitely not the guy who is going to give you reasons to buy #bubbles. At least 90% of the Old Wall can get you that call this morning (for a brokered fee!).
So don’t expect that from me today and/or on Monday if the jobs report is magically “better than expected” this morning either. The main reason for that isn’t an ideology or a marketing model – it’s a risk management process.
My catalyst in both 2007 and 2014 was/is the same. It’s called the economic cycle. Whether naval gazing US stock market consensus is forced to acknowledge it today, next week, or next month isn’t the point.
Long-term Bond Yields, Oil, Gold, Japan, Russia, Brazil, Europe, Emerging markets, Russell 2000, etc. have already confirmed it.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.22-2.40%
WTI Oil 76.23-79.92
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer