“I’m at my best in a messy, middle-of-the-road muddle.”

-Harold Wilson

Have you ever “muddled along”? For those of you who are new to Wall Street, those are code words for “the market can’t go down” (as long as nothing really bad happens).

But, like most things group-think, the precise definition of what people might think something is, isn’t! To muddle (verb used with object per Dictionary.com):

  1. To mix up in a confused or bungling manner
  2. To cause to become mentally confused
  3. To cause to become confused or stupid or as if with an intoxicating drink

Oh boy, do I like that last one! If we either start re-living the stagflation of the 1970s (like Harold Wilson did: PM of the UK 1 and 1) or just get right hammered every night, all of our real growth hopes might just muddle away.

Time To Muddle Long? - Fed cartoon 06.10.2016

Back to the Global Macro Grind

“So”, in the spirit of Old Wall sayings, I’m going to muddle to the long side of US Equities this morning. Yep, you read that right. For the first time all year I’m going to mentally confuse you in a bungling manner.

To be crystal clear, this is more of an immediate-term risk management call than it is a change in the bearish #GrowthSlowing call we’ve had for almost a year now. At best, this is going to be messy. And I reserve my liberty and rights to change my mind 50 handles higher.

What’s 50 handles?

  1. In beloved beta chasing terms, 50 handles in the SP500 = 50 points
  2. The SP500 just dropped approximately 50 handles (-2.4%) in less than a week
  3. A 2.4% move, in equity return terms, beats more than 90% of equity managers YTD

To be doubly clear as I muddle, I don’t subscribe to some passive aggressive version of Wall Street relative performance Schadenfreude where my goal in life is to help you achieve mediocre returns and/or barely beat beta. I want you to crush it.

For “long onlys” what is crushing it from both #TheCycle high of July 2015 and for 2016 YTD?

  1. Not being long any European or Japanese Equity Index whose draw-down/crash is currently -22-30%
  2. Not being long higher beta versions of US Equities like the Nasdaq or Russell which are -7.2% and -11.4% since July 2015
  3. Being long the Long Bond and/or anything equities that looks like a bond (Utilities = +17.3% YTD)

For hedgies…

  1. How about being up +22.2% YTD if you had a 2/20 fund long Utes (+17.3%) vs. short Financials (XLF) -4.9% YTD
  2. Long Gold, i.e. #GrowthSlowing (+21% YTD) vs. Short Copper (i.e. demand hasn’t “bottomed”) -5.5% YTD
  3. Long Energy (XLE +11.3% YTD) on Down Dollar Dovish Fed (#GrowthSlowing) vs. Short Ackman (VRX -76% YTD)

That’s right muddlers – there has been a ton of alpha out there to be had. So let’s get with the program and do what we’re paid to do and get the next move right from here. For US Equity Beta chasers, I think the next move is Up, then Down. Potential catalysts:

  1. The Fed (going back to dovish today with Late Cycle #EmploymentSlowing)
  2. Brexit (if they don’t exit)
  3. Mean reversion and performance chasing

Sound risky? Oh yeah. But aren’t we all just gambling that the Fed will help us “muddle away” as the rest of The People in this country melt-down? With a lot of PMs behind the 8-ball, don’t forget there’s a natural willingness to believe in almost any catalyst at this point.

As Richard Thaler reminds us in Misbehaving, “gambling when behind in an effort to break-even can be seen in the professional investor… people who are threatened with big losses and have a chance to break-even, will be unusually willing to take risks.” (pg 84)

If you’re one of the alpha generators playing with 1 year and YTD relative and absolute performance leads right now, getting net long US Equity Beta here for an immediate-term return that beats the year-over-year return of the SP500 (-0.44%) sounds like fun, no?

While you might want to just get long SPY, here’s what I’ve done on red this week (in Real-Time Alerts):

  1. Gone from 3 LONGS and 11 SHORTS to 6 LONGS and 3 SHORTS
  2. Covered my SPY (SP500 short position)
  3. Signaled BUY in Healthcare Stocks (XLV) for the 1st time in 2016
  4. Signaled BUY in High Dividend Yield (VYM) stocks
  5. Signaled BUY in a low-beta big cap exposures (LMT)

Yep. If you’re muddlin’, keep it simple, stupid, I guess. The quantamental reasoning for this is two-fold:

  1. All of US Equity Beta signaled immediate-term TRADE oversold (and volatility overbought at VIX 22) yesterday
  2. Our predictive tracking-algo for US GDP just ticked up to +1.4-1.7% year-over-year

More on the muddling GDP reality later. Unlike the Fed, the thing about being objective and data-dependent is that we actually change as the data does. It’s non-linear.

Sure, a big reason for GDP not having a 0% in front of it for Q2 (like it did in Q1 on a SAAR basis) is that the US government is understating inflation with a 0.7% Deflator. But that is what it is and it’s going to give us a middle-of-the-slowing-road muddle.

It’s messy. It’s confusing. It’s bungling. So I suggest you trade the chop associated with it accordingly.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.57-1.76%

SPX 2066-2100
RUT 1140-1170

NASDAQ 4

VIX 16.03-21.55
USD 93.13-95.45

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Time To Muddle Long? - 06.15.16 EL Chart