My Crystal Ball

This note was originally published at 8am on January 06, 2015 for Hedgeye subscribers.

“It’s far better having an approximate answer to the right question, than an exact answer to the wrong question.”

-John Tukey

 

Tukey was one of the most important mathematicians of the 20th century. The probability man died in 2000 and the only knock on him is that he went to Princeton. Yes, he was a Bayesian. He was also a Bell Labs guy. That’s where they asked the right questions.

 

The Global Macro question remains: will global #GrowthSlowing + #Deflation matter to both the US economy and its stock, bond, currency, and commodity markets? If you thought yes, then how so? Oh, and how did you position for that?

 

After rubbing it this morning, my crystal ball (my wife got me one for my birthday – no joke, a real one) says A) yes, it mattered and B) it translated into both crashing global long-term bond yields and commodity prices. “So”, let’s keep re-positioning…

 

My Crystal Ball - 78

 

Back to the Global Macro Grind

 

Re-position? Yes, as in rotate. With the UST 10yr Yield tapping the 1%-handle this morning:

 

  1. Book some gains in those Long Bond (TLT, EDV, BND, MUB, etc.) holdings
  2. Re-position some of that capital into oversold US consumption equities
  3. And send your Old Wall broker an email that says your crystal ball guy said to :)

 

In Hedgeye Asset Allocation terms (re-positioning = rotation of the allocation!), that means:

 

  1. Taking net Fixed Income down from max allocation to an asset class (1/3 of my capital) to +28%
  2. Taking net US Equity asset allocation up from +3% on December 29th, 2014 to +10%
  3. Do nothing in International Equities and/or Commodities

 

No, I don’t want to chase Gold up here. I haven’t told you to engage in amateur knife catching crude oil contests for the last 6 months either. My net asset allocation to #deflation (Commodities) = 0% because the answer to THE question mattered.

 

“Net” – what does that mean, net?

 

Net (and in rate of change terms) is how I think. Not because my crystal ball told me so (remember, I didn’t have one until today!), but because that’s how I learned, at a young age in the hedge fund business, to manage risk.

 

I know having longs and shorts isn’t for everyone. And it really shouldn’t be. On the short side in particular, at least 2/3 of hedge funds don’t do the hedging thing very well, don’t forget.

 

We are better than bad at that – and we also don’t tell our long only investors to chase tops. That’s why I referenced December 29th, specifically. If you are in the business of compounding returns and dynamically allocating assets, that day mattered because:

 

  1. The SP500 was 70 handles higher than yesterday’s 2020 close, at an all-time closing high of 2090
  2. The yield on the 10yr US Treasury was 2.25%

 

If you are a portfolio manager of anything Fixed Income or US Equities, THE question that day was:

 

  1. BUY
  2. SELL
  3. Or DO NOTHING?

 

As all of you veterans of the risk management gridiron know, sometimes doing nothing is the best answer. But, unless you are in the business of low-fee generating-passive-asset-management, sometimes you do need to BUY or SELL!

 

“So”, as the Old Wall analysts like to say, on December 29th:

 

  1. If you bought more Long Bond (TLT) exposure, the 10yr Yield just had a 12% move from there (1.98% last)
  2. If you bought more SPY (there was a big fund flow into it that week), you just lost -3.3%

 

“So”, crystal ball says you wanted to have done 1. And not 2.

 

The other thing crystal ball is telling me this AM is don’t short the Russell 2000 today. #Pardon? Yes. You heard it from whatever this transparent ball is that I am rubbing this morning first! Do not short the IWM because:

 

  1. After another swift -3.1% correction, the Russell 2000 is signaling immediate-term TRADE oversold
  2. The inverse of that beta trade (VIX) is signaling immediate-term TRADE overbought at 20.59
  3. Hedge Fund Consensus is short the Russell (IWM) vs long SPY

 

Back to the “net” concept. If you want to earn your keep in 2 and 20 land, it’s usually best to not be pressing the lows on the short side of your net exposure in a crowded macro short.

 

Rather than rant any further this morning, here’s a 2 minute video explaining why “I Would Not Do What Hedge Funds Are Doing” in what was one of our best Global Macro short ideas 1-year ago today: https://www.youtube.com/watch?v=hrl7J_HVKZw

 

Crystal Ball just told me to stop there. #Cool. I’m already starting to like this thing.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.97-2.16%

SPX 2017-2051

VIX 16.26-20.59
Oil (WTI) 48.45-54.15

Gold 1166-1217

Copper 2.73-2.84

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

My Crystal Ball - 01.06.15 chart



Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more