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“You can’t eat risk adjusted returns.”

-Old Wall

Actually, was it the Old Wall or its clients who said that first? Good question given that the brokerage statement has bad risk management premise. This is an important topic that Lasse Heje Pedersen delves into in Chapter 2 of Efficiently Inefficient.


“Suppose for instance that a hedge fund beats the risk free rate by 3% at a tiny risk of 2%, realizing an SR (Sharpe Ratio) of 1.5. Some investors might say ‘well it’s still just 3% - I was hoping for more return.’ (pg 31)

What people need, want, or “hope” for in terms of returns has nothing to do with what they are going to get. Hope is not a risk management process. Neither is levering up a portfolio that is no “smarter” than an unlevered one in a bear market.

Eating Monkey Returns - trust my gut cartoon 10.14.2015  2

Back to the Global Macro Grind

Bear market underway? Big time. And forget the obvious ones that even the most consensus US-Equity only perma bull is now forced to acknowledge (the ones in FX, Commodities, EM, etc.) – look at the one you already have in the US stock market!

On slide 31 of our Q1 Global Macro Themes presentation yesterday, we showed how bad the internals of the US stock market are by looking at the Russell 3000 (i.e. 98% of stocks you could be long or short):

  1. The median draw-down for stocks from their respective 52-week highs in the Russell 3000 is -22.5%
  2. The mean (average) draw-down is a nasty -27.7%
  3. And 76.8% of stocks in the Russell 3000 are currently trading below their 50-Day Moving Monkey

Don’t be the monkey.

As long-time readers of my daily rant know, I used to be a monkey. And I spend a lot of time trying to teach both me and you how not to be a monkey. Chasing 1-factor (price momentum) moving averages will eventually eviscerate your hoped-for returns.

What we do is different. And we do not apologize for that.

The most basic quantitative risk management tool I have that keeps me away from being consensus is my 3-factor model (PRICE, VOLUME, VOLATILITY) to measure a security’s risk, and I do that across 3-core risk management durations:

  1. Immediate-term TRADEs
  2. Intermediate-term TRENDs
  3. Long-term TAIL risks

In our Daily Trading Ranges (and TREND signal) product, you can see that we’ve been highlighting widely held US stocks that have been signaling bearish TREND (our best back-test duration) now for 3-6 months:

  1. Apple (AAPL)
  2. Priceline (PCLN)
  3. Disney (DIS)
  4. Valeant (VRX)
  5. Netflix (NFLX)

Since I only have time for 1 wife and 4 kids, I don’t fall in love with “stocks.” They are all just tickers to me. Sometimes I like them (like McDonald’s, MCD, right now). Sometimes I don’t like them (Gap, GPS, which I told you to short again in Real-Time Alerts yesterday).

While I shall not love (or hate) stocks, one thing I thoroughly enjoy is fading what has become an epic “Hedge Fund” consensus. As you can see in today’s Chart of The Day (slide 18 in the Macro Deck), there is a raging #Recession in Contrarian Thinking.

Trailing Hedge Fund Correlation to Beta held above 0.90 for a 2nd year in a row in 2015. Beta Chasing (chasing charts) breaks down when A) the “charts” do and B) Sector Variance breaks out (like it did last year).

When S&P Sector Variance is low, a brain dead monkey can make money. Maybe that’s why I nailed being bullish on US “stocks” in 2013! Low-variance means everything does the same thing – and almost every sector went straight up in 2013.

When Sector Variance breaks out (some sectors crash, some go up), then a large population of monkeys chasing charts dies and 2 smaller populations of them emerge:

  1. The “Value” Guy/Gal
  2. The Momentum Guy/Gal

Value guys in particular got killed in 2015 – that’s mainly because they started buying what they thought were “cheap” Energy and Basic Materials stocks using the wrong macro assumptions for #Deflation and #GrowthSlowing. And … cheap got cheaper.

All the while, momentum guys killed it in 2015 – and that’s mainly because they just stayed with charts and stories that weren’t breaking down like mainline (cyclical) growth and inflation assumptions were.

So far in 2016, neither value nor momentum guys/gals are getting paid. And that has been a consistent leading indicator for a US #Recession (see the years 2000 and 2008 for details) i.e. the 20-30% of stocks that are still working, stop working.

When most things stop working, you can only eat what you harvested. Our profession would have much higher credibility if we taught people that the time to harvest is as the economic and profit cycle begins to slow. The time to “invest” is when a recession is abating.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.16-2.31%

RUT 1094-1140

VIX 17.28-22.65
USD 98.01-99.77
Oil (WTI) 35.04-38.11

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Eating Monkey Returns - 01.06.16 EL chart