Process of Discovery

This note was originally published at 8am on April 21, 2015 for Hedgeye subscribers.

“Humble inquiry is a process of discovery.”

-Ed Hess

That’s a solid research thought from a section of a solid #behavioral book I finished reading on vaca, Learn Or Die. The section is titled “Asking Not Telling” and I thought a lot about that when it comes to my #process.

In addressing our ability (or lack thereof) to listen, Hess cites the behavioral research of Edgar Schein (MIT Professor) “who believes that the US has a culture that values telling over asking.”

“I know more than you, and therefore, I am smarter and better than you.” Sound familiar? … “alternatively, asking says I care about what you think and I am ready to invest myself in listening.” (pg 66) Are you a good listener?

Back to the Global Macro Grind…

While I am still quite bullish on both stocks and bonds into the Fed meeting next week, I am still short of something that I always seem to be short of – time! That makes the listening exercise all the more important. It’s who/what you listen to that matters.

#focus

For the first part of my career, I listened to my bosses. Then, while my bosses were making mistake, I started to realize that if I listened more to the market, I could help them make less mistakes. Hedgeye’s #process is highly influenced by this experience.

As our process evolves, more and more of my time is spent listening to my analysts. That’s a role reversal from my beginnings. Technically, I’m the boss – but our analysts are empowered to know more than me about their respective domains.

In the spirit of listening to the best analyst there is (Mr. Macro Market), here’s what he’s saying this morning:

1. Pain Trade in US Stocks = #on
2. Chinese, Japanese, and European Bull Market in Equities = still #on
3. FX and Fixed Income markets = #boring

Boring works. Defined in Hedgeye mathematical speak, boring is when the variance of what I call the risk range compresses. Tighter ranges are easier to risk manage. They tend to trend upwardly, as volatility falls. They don’t have a lot of chop.

There‘s not a lot of “chop” in raging bull markets (like the Shanghai Composite, Nikkei, or DAX) as the only things getting chopped there are fingers of the short sellers who didn’t obey the commands of the central planners.

If you want to discover “chop” try trading something with a widening risk range (rising variance) that goes both up and down with no discernible TREND, then drop whatever that something is -1% one day, and ramp it +1% the next. Rinse/Repeat.

That something, in this morning’s case (per Mr. Macro Market) is the SP500:

1. She was -1.1% on Friday, then +0.9% yesterday
2. She’s been down, up, down, up for the YTD, depending on the month you listened to
3. And now, she’s ramping what I call the Pain Trade to test the top-end of the range (again)

Pain Trade is the one that the largest % of market participants are not positioned for. One very important way to listen to where the crowd is positioned is in futures and options contract terms. Before yesterday’s (and this morning’s pre-market futures) ramp, here’s where non-Commercial CFTC futures/options NET positioning stood:

1. SP500 (Index + Emini) net SHORT position of -40,978
2. The 3 month avg net position = +13,092 (net LONG)
3. The 6 month avg net position = +31,930 (net LONG)

In other words, if you’re good at listening to Mr. Macro Market, then you have to be quick to contextualize what it is you think you heard. I don’t know about you, but as I get older I need to double check things as I see/hear less well! Then there’s listening to opposing thoughts across multiple durations and trying to put that within a context of rising and falling probabilities…

This hockey player guy still thinks the Fed is going to be less hawkish on rates in 2015, but then there’s this Japanese dude named Hamada who told Abe that he might need moarrr central planning cowbell overnight = Down Yen, Up Dollar…

Trying to risk manage it all can be quite humbling, indeed.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) across 12 big macro factors are now as follows:

UST 10yr Yield 1.85-1.95% (bearish)
SPX 2084-2117 (bullish)
RUT 1252-1278 (bullish)
Nikkei 19717-20058 (bullish)
DAX 11786-12576 (bullish)

VIX 12.34-15.27 (bullish)

USD 97.02-98.95 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 118.61-121.12 (bearish)
Oil (WTI) 48.72-57.69 (bearish)
Gold 1181-1210 (neutral)
Copper 2.67-2.79 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer