The Idea Generation Game

“It constipates the whole process.”

-Stephen King

While I am sure he has plenty of it, that’s what the King pin of American supernatural fiction had to say about cash. “Money is great stuff to have, but when it comes to the act of creation, the best thing is to not think of it too much.”

Sadly, that is not how some think about what they call their “dough.” On the independent research battle front, I can’t count how many people told me we’d be wrong on interest rates falling because guys with a lot more money than me thought otherwise.

Who raised these people to think that way? America was built on a meritocracy of new ideas replacing broken ones. The day we wake up thinking that only the people with money are “smart” is the day we start losing. Anyone can win the idea generation game.

The Idea Generation Game - 2 it

Back to the Global Macro Grind

Fast or slow, you probably can’t win this year’s game. Not with our July 2014 call for a breakout in cross asset class volatility in play. Just watch Greece go from -13% to -2% YTD on a floater headline that their “new” Finance Minister is “creative”, and you’ll get my point.

Don’t confuse moving slowly with moving patiently either. There’s a big difference. #Patient players can move both fast, and slow. That’s the point. There’s a time to risk manage your active portfolio – and there are times to wait and watch.

Risk manage your portfolio? Yes. It’s commonly called trading – and while you can feel really “smart” buying and holding stocks at 10 VIX, at VIX 15-25… not so much. Look what led yesterday’s v-bottom rally off the terrible January ISM report’s lows:

  1. US listed Oil & Gas Stocks (XOP) = +6.1%
  2. US listed Energy Stocks (XLE) = +3.1%
  3. US listed Financials (XLF) +1.6%

Yes, 2015’s biggest losers led yesterday’s gains. Unless you made some counter-TREND moves (i.e. booked gains in shorts that were working and went long some of the inversely correlated sectors and asset classes linked to a Down Dollar move), you lost ground yesterday.

While generating both absolute and relative returns, every day, would be nice – that only happens on either Twitter or in fictional novels about rainbows and puppy dogs. Real world risk management is far closer to Stephen King’s “It!”

What is it? What is that thing that helps Portfolio Managers and Self Directed Investors alike beat the market year-in and year-out? I’d say it has a lot do with having a more flexible #process than a constipated one.

Did consensus really think the US Dollar was going to go up, every day?

  1. Friday’s GDP miss/slowing was a clean cut negative for the US Dollar
  2. So was yesterday’s ISM slowdown from an already slowing 55.5 in DEC to 53.5 in JAN
  3. And so would be a bad jobs report on Friday…

But you already know that since the flexible and prepared player knows this USD correlation matrix is dominating:

  1. Inverse correlation between USD and the CRB Index (19 commodities) on a 90-day duration is -0.97
  2. Inverse correlation between USD and Oil on a 90-day duration is -0.95

In other words, if you got the rate of change in the USD right, you’ve gotten both the commodities and Oil crash right. Oh, and you played the counter-TREND reversal beautifully too!

Seriously. Getting that right is not that easy.

But not being Consensus Macro is easier than thinking it’s “smart.” Here’s where the “smart” hedge fund futures and options bets were (non-commercial CFTC net futures/options positioning) going into yesterday’s counter-TREND macro move:

  1. Peak multi-year net LONG position in US Dollars of +70,456 contracts (vs. the 1yr avg of +24,739)
  2. Peak multi-year net SHORT position in the Euro of -177,296 contracts (vs. the 1yr avg of -83,603)
  3. Net SHORT the Russell 2000 at its peak net short position of the year (-30,174 net short contracts)

That’s right, after all of these things have worked, big time, for 6 months – all of the “smart” money has crowded into them.

Sure, there was a net LONG position of +324,181 in Crude Oil going into yesterday’s rip, but don’t forget that Wall Street was been levered long Oil the entire way down too (the 1yr avg net LONG position in Crude is +366,487 contracts!).

“So”, don’t constipate yourself with consensus. Motivate yourself to open your mind and move aggressively when the big things moving macro markets move. That sure beats counting your moneys. “There’ll be time enough for countin’, then the dealing’s done.”

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.64-1.78%

SPX 1

VIX 18.25-21.92
USD 93.41-95.82
WTI Oil 42.84-51.31
Gold 1

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

The Idea Generation Game - 02.03.15 chart