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“We are what we repeatedly do.”


Yesterday Coach Doyle and I took our Mid-Fairfield Rangers Mite Hockey Team up to New Haven, CT for a tilt with Yale Youth Hockey at Ingalls Rink. Commonly known as The Whale, our kids (and parents) got the full tour of the Yale Hockey facilities after the game.

Yale Hockey Coach Keith Allain had the aforementioned quote painted into the legend that is becoming his men’s locker room. Reading that gave me an important pause for reflection – one that I was quite grateful for. It reminded me why we do what we do in this life.

What we do as parents, coaches, and professionals is what we are. What we do @Hedgeye is transparency, accountability, and trust. We are both a team and a process. We win, lose, and learn, as a team. With time, we evolve.

Back to the Global Macro Grind

Some people don’t like reading about coaching, parenting, and leadership. We do. And we don’t apologize for that. We have a macro market opinion that is born out of a rigorous rate-of-change risk management #process, and we’re very clear on that too.

You’re either reading this right now or Barron’s “Bear Scare – Why The Selling Might Be Almost Over.” The difference between our process and Old Wall Media’s is that we told you to sell before the Russell 2000 deflated -19.2% from its July #Bubble high.

We Are A Process - denial cartoon 09.28.2015

Post the worst week 1 for a US stock market ever (which is still, by our definition, a very long time), the SP500 is -6% YTD and -10% from its all-time high of 2130 in July of 2015.

Nothing last week should have surprised you – what got hit the hardest has been getting hit (hard) for the last 6 months:

  1. High Beta Stocks lost another -8.9% week-over-week and are -17.6% in the last 6 months
  2. Small Cap Stocks lost another -6.9% week-over-week and are -17.3% in the last 6 months

*Style Factors: Mean performance of Top Quintile vs. Bottom Quintile of SP500 companies

What seemed to surprise some people was that the Financials (XLF) are not a good place to be during both #Deflation and an industrial/cyclical US #Recession. Hint: when you have those, long-term rates fall. Here’s how that looked last week:

  1. US 10yr Treasury Yield dropped another -15 basis points last week to 2.12%
  2. US Yield Spread (10yr minus 2yr) flattened to a cycle low of 118 basis points wide
  3. US Financials Stocks (XLF) lost -7.3% last week and remain bearish TREND @Hedgeye

If you thought that cyclical “PMIs bottomed” when the employment/consumption/profit cycle peaked (at the end of Q2 2015), and you bought the Financials on that, you’re down -13.6% since the July high. Beats being long Apple from there (down -26.5% since SP500 top)!

That’s the most important thing consensus Macro is missing right now – that while cyclicals peaked in late 2014 (that’s why they call them cyclicals!), classic #LateCycle things like employment and corporate profits peaked 3-9 months after that.

That’s why stocks sold off on Friday’s #SuperLateCycle jobs “news.” In rate of change terms, fully-loaded with all the part-time hiring and construction work (yes, the weather helped in that case):

  1. December non-farm payroll growth slowed to 1.88% year-over-year growth vs.
  2. The Cycle Peak of 2.34% non-farm payroll growth in February of 2015

I know. I know. That’s not the way that people who think in terms of “good” or “bad” thought about the jobs report. Evidently they thought wrong. We do rate-of-change (i.e. we think in terms of things getting better or worse) and contextualize data within the cycle.

We do it that way because Mr. Macro Market does too. By the time the “companies” and media tell you, it’s too late. How do you think JP Morgan (JPM) is going to characterize the current rates and “market environment” when they report earnings on Thursday?

If they’re being transparent, accountable, and trustworthy on the matter, I’m thinking they’re talking about the Yield Curve flattening, market volatility ramping, and Credit Spreads widening. Our process has been signaling these risks rising since July too.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.09-2.21%

RUT 1028-1090

VIX 20.22-28.14
USD 97.54-100.14
Oil (WTI) 32.05-35.68
Copper 1.96-2.09

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

We Are A Process - 01.11.16 EL chart