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“Connecting the dots and solving a problem by being exposed to more ideas.”

-Gary Klein

That’s how cognitive psychologist Dr. Gary Klein opens a fantastic chapter that he titled “Connections” in one of the better #behavioral books I have read since Thinking, Fast And Slow (Kahneman) – it’s called Seeing What Others Don’t.

That is the goal, after-all. Why else would you work in this profession? I may not run money anymore (= conflict of interest with you, our subscribers), but I wake up at this godforsaken hour every morning with one goal – trying to see something that consensus hasn’t.

For me, “connecting the dots,” is a repeatable process. On 2 hand-written pages in my notebook, I write down market prices, volumes, volatilities, etc. (every day, for 16 years), then I try to connect trades, trends, and themes - i.e. let Mr. Macro Market tell me what to do.

Connecting The Dots - z z notebooks

*** Click here to join Keith live this morning at 9:00am ET on The Macro Show.

Back to the Global Macro Grind

The #process is actually becoming simpler as I add more people and parts. My experience in building Hedgeye for the last 7 years has exposed me to an entirely new generation of thinking. I’ll be forever thankful to my millennial teammates for that.

Admittedly, to the more qualitative research crowd, I can be agitating. But #NoWorries, they agitate me too. We’re all just random participants in a dynamic and non-linear ecosystem anyway. Mr. Market doesn’t care what you think about the Apple-Hermes watch.

What he (or she) did care about yesterday was this thing that AAPL has though – from a Style Factoring perspective, it’s called US Equity Market Beta:

  1. SP500 had a nasty intraday reversal, closing -1.5% on the day, taking its current correction back to -8.8%
  2. Russell2000 continued lower alongside most things beta, taking its draw-down to -11.4% from YTD high
  3. Apple (AAPL) down -1.9% on “we’re gonna sell lots of new products” day, remains bearish TREND @Hedgeye
  4. Biotech (IBB) down -2.2% after failing at TREND resistance (draw-down -13.6% from its all-time #Bubble high)
  5. Oil & Gas Stocks (XOP) down -2.7% and are down -36% from where people chased the “reflation” trade in Q2

While these are all different flavors of US Equity Beta Bets, they’ve all been quite painful to be levered-long of during both a top-down growth and inflation slow-down and a bottom-up revenue and earnings one.

This is where both the market and I completely disagree with the Lee Cooperman case that this bear developing in the US Equity Market is all about everything but the fundamentals. Connect the dots man – being long Linn Energy (LINE) during #Deflation?

Back to the most over-owned stock in human history (in market cap and manic media news-flow terms), newsflash: “Apple is relatively cheap” @WSJ (today). Really? I didn’t know that. What does the company do again? Right. It’s got big cap beta.

Particularly in developing bear markets (born out of economic and profit cycle peaks = 2000, 2007, 2015) never underestimate the power of the alpha turning into beta.

Japanese stocks are “cheap” (have been for decades). And they recently generated a lot of alpha for Global Equity managers who are long/short (overweight/underweight) other big cap equity markets. But now all that alpha is turning into an equity beta risk. Why?

  1. Mr. Market signaled get out of Nikkei on bounces (so we did)
  2. The causal and correlating factor for Japanese Stocks to go down is the Yen going up
  3. If the Fed comes our way on “no rate hike” in SEP = Dollar Down à Yen Up

No Lee, that has nothing to do with the machines. So don’t blame them. It has everything to do with connecting the macro dots. Moving along the line items in my notebook, that brings me to what they call the Fed’s “dots” this morning:

  1. Fed Fund Futures on a SEP hike have dropped back down to 30% (Mr. Market’s vote on probability of a rate hike)
  2. Larry Summers is still lobbying to be Hillary’s boy with “5 Reasons Why” the Fed shouldn’t hike
  3. Hilsenrath (Fed man @WSJ) is implying the Fed may or may not hike in SEP #thanks

Sadly, this means the Fed has NOT yet decided on next week’s rate move and are literally watching the S&P Futures to make a game-time decision about a player (the US economy) that is clearly injured in Q3 GDP slowing terms.

Shall we blame risk parity people for that? Confusion, my non-linear friends, breeds contempt in markets. It also perpetuates volatility. And this brings me all the way back to the #1 disconnect between Hedgeye’s forecast for 2015-2016 that isn’t yet consensus:

#LateCycle Growth Slowing (globally and locally)

From Steve Einhorn (Cooperman’s long-time macro strategist at Omega Advisors) who said on July 20th, 2015 (literally the day AAPL put in its all-time peak at $133) that there’s “still quite a while to go” to almost every consensus economist in the league… the “dots” on both their growth expectations and returns continue to be pushed out.

And if you want to connect your own dots on that very basic reality (497 of 500 S&P Companies have reported Q2 = Down -3.5% Revenues, Down -2.2% Earnings), take Einhorn/Omega’s word for it: “fundamentals largely determine how the stock market does.”

I’m thanking my notebook and team for seeing that.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.11-2.24%

SPX 1
RUT 1116-1175
Nikkei 17,108-19,137
VIX 21.86-31.70
EUR/USD 1.11-1.13
Oil (WTI) 41.44-48.41

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Connecting The Dots - z app l ll  ll 09.10.15 chartvf