“You buy cheap assets that are trending up and short expensive assets that are coming down.”
Sounds pretty simple, eh? If you can nail the assumptions in the statement, that is. “Cheap” and “expensive” need to be defined using the right forward looking cash flows (not those of consensus) and “trending up” or “down” needs to be quantified, not hoped for.
Since Asness is the founder of a quantitatively driven hedge fund (AQR), he’s much more indifferent about what is going up and down than some qualitative fund managers who get married to stocks and their slide decks.
That’s not to say storytellers can’t kill it in our profession (they especially do in bull markets). It’s simply a reminder that there are lots of different strategies to consider. When the economic cycle slows, calling something “cheap” on the wrong numbers can kill your returns.
Back to the Global Macro Grind…
Table 1.2 in Efficiently Inefficient, by Lasse Heje Pedersen, does a good job tabling the differences between “Value” and “Momentum” hedge fund managers. Pedersen interviewed names you’d recognize like Asness, Ainslie, Chanos, Soros, Scholes, Griffin, and Paulson.
I call this out this morning as this is the most important debate going on in our investor base into year-end. It seems that many who were long “value” (cyclicals) this year are still long, whereas those who have been short the cycle continue to press it.
The economic cycle, that is. As in the thing that matters most at big cyclical turns. Unlike hitting daily, weekly, and monthly “exposure” and return targets, growth and inflation cycles are much more glacial. In other words:
- When INFLATION ACCELERATING peaked (2011-2012), “cheap” commodity plays peaked
- When GROWTH ACCELERATING peaked (Q414-Q215), “cheap” cyclicals started to trend down
“Expensive” growth stocks that showed organic #GrowthAccelerating (as cyclicals slowed like cyclicals do during a slow-down – hence the term cyclical) got even more expensive after the US Corporate Profit Cycle peaked in Q2 of 2015. This happened in 2H 2007 too.
This brings us to the FANG…
For those of you who are new to chasing “Momentum” as a Style Factor (expensive stocks that are trending up), the components of the FANG are Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL).
If you’re looking for an intermediate-term TREND signal on these stocks (a way to quantify “trending up or down”):
- FB intermediate-term TREND support = $101
- AMZN intermediate-term TREND support = $606
- NFLX intermediate-term TREND support = $115
- GOOGL intermediate-term TREND support = $720
Unlike most establishment “technicians” on Wall Street, I don’t use single-factor point and click price momentum charts to define what is bullish or bearish from a TREND perspective. I use a composite 3-factor signal that includes PRICE, VOLUME, and VOLATILITY.
I don’t use my quantitative signal to be mean to people who don’t do macro. I use it because it works. I can assure you that I have back-tested and tried most technical “signals” you can get free on the internet. They are free for a reason. They don’t work at the macro turns.
Consider an “expensive” and a “cheap” stock that are currently being defanged:
- Disney (DIS) broke its intermediate-term TREND line of $111, 2x in 2015 (AUG and DEC) on accelerating volume
- Apple (AAPL) broke its intermediate-term TREND line of $119, 2x in 2015 (AUG and DEC) on accelerating volume
Disney (DIS) now fits the intellectually appealing “expensive that is trending down” short-idea criteria, whereas Apple (AAPL) is crushing the valuation intellects as “cheap” continues to get cheaper.
So why doesn’t the Old Wall and its circus of chart chasers (they are loudest at every economic cycle peak) start talking about DA-FANG? Or Defanging Momentum? Give it some time.
Because that’s all that remains between #Deflation and #GrowthSlowing morphing into a recessionary stock market signal (see Credit Markets for details). That’s when both “expensive” and “cheap” go down at the same time.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):
UST 10yr Yield 2.12-2.32% (bearish)
SPX 1 (bearish)
RUT 1106--1155 (bearish)
VIX 17.86-24.41 (bullish)
USD 97.61-99.42 (bullish)
EUR/USD 1.07-1.10 (bearish)
Oil (WTI) 34.99-37.37 (bearish)
Gold 1050-1085 (bearish)
Copper 2.03-2.15 (bearish)
AAPL 104-111 (bearish)
AMZN 641-682 (bullish)
GOOGL 745-779 (bullish)
KMI 13.85-17.35 (bearish)
DIS 104-111 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer