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CHART OF THE DAY | Stocks: Puppies & Rainbows? Or Jobs Report Bomb

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... To put this in practical terms, let’s go through the SP500 setup one more time:

  1. It just had a text-book bounce off the low-end of my immediate-term 2167-2192 risk range
  2. It’s still signaling bullish from an intermediate-term TREND perspective (2141 support)
  3. It’s likely going to have a big move in/out of the US jobs report on Friday

If the jobs number is a bomb (Dollar Down, Rates Down), can stocks rip? Yes. If the jobs number is rainbows and puppy dogs (Dollar Up, Rates Up), can stocks get ripped? Yes. Can anything happen in between? Yes."

 

CHART OF THE DAY | Stocks: Puppies & Rainbows? Or Jobs Report Bomb - 08.30.16 EL Chart


Bending Bell Curves

“You typically find a different distribution than a bell curve.”

-Benoit Mandelbrot

 

Since I got back from vaca, the questions I’ve been getting on The Macro Show (now daily at 9AM EST @HedgeyeTV), have been outstanding. I learn a lot by trying to simplify complex topics like asymmetry, volatility, and power-laws. Lots to learn, together.

 

On the topic of what he calls the “power of power laws”, the aforementioned quote comes from The Brot of all fractal bots, Benoit Mandelbrot. Here’s his great statistical summary of how long-term markets prices haven’t fit the pattern of a bell curve:

 

In fact, the bell curve fits reality very poorly. From 1916 to 2003, the daily index movements of the Dow Jones Industrial Average do not spread out on graph paper like a simple bell curve. The far edges flare way too high: too many big changes. Theory suggests that over time there should have been 58 days when the Dow moved more than 3.4%; in fact there were 1,001. Theory predicts 6 days of index moves beyond 4.5%; in fact there were 366. And index swings of more than 7% should come once every 300,000 years; in fact the 20th century saw 48 such days. Truly, a calamitous era that insists on flaunting all predictions.” (The Misbehavior of Markets, pg 13)

 

Bending Bell Curves - bell curve

 

Back to the Global Macro Grind

 

Inasmuch as market prices can “shock” people in a short period of time, they can do absolutely nothing for long periods of time. There is nothing “normal” (in bell curve terms) about risk managing markets. So study deliberately and embrace uncertainty.

 

Prior to last week, there had only been 5 trading days in the last 30 where the SP500 moved more than +/- 0.50%. Now, including yesterday’s “ramp” of +0.52%, the SP500 has had 2 up/down days of barely > 0.50% in the last week (one each way).

 

In other words in a sea of nothingness, if you were positioned net shorter (or less long) ahead of the -0.52% down day (AUG 24th) and then net longer (or less short) coming into yesterday’s +0.52% move, you did your job, selling (some) high and buying (more) low.

 

Gotta love the +/- 0.52% number btw. Right on the rails! Maybe someone centrally planned that.

 

Not to go all immediate-term TRADE on you this morning without contextualizing what I’m thinking about those moves within my intermediate and long term TREND and TAIL durations, but the dynamism of the short-term is why I built my “risk range” process.

 

If my inputs and assumptions for the immediate-term risk range were static, using bell-curve standard deviations of risk, my daily ranges would be a lot more wrong than they’ve been generally right.

 

To the contrary, I’m constantly resetting my inputs and assumptions based on real-time PRICE, VOLUME, and VOLATLITY. That’s why the risk ranges can be tightening some of the time and widening at other times. Currently, for the SP500, the risk range is tightening.

 

If a fund of fund wants to call this a “systematic strategy” within my multi-factor, multi-duration process, so be it. I call it a risk management overlay with some rules:

 

  1. When VOLATILITY is undergoing a PHASE TRANSITION from bearish to bullish, risk ranges are widening
  2. When VOLATILITY is undergoing a PHASE TRANSITION from bullish to bearish, risk ranges are tightening

 

And since I like it tight, tightening ranges are what I am looking for on the long side inasmuch as widening ranges are what I am looking for on the short side. Phase Transitions, don’t forget, are confirmed changes in intermediate-term TRENDs. They aren’t TRADEs.

 

Within the immediate-term TRADE duration there are a ton of head-fakes. That’s why I humbly submit you need both a fundamental research team and a set of potential calendar catalysts to be on the lookout for what aren’t head-fakes.

 

To put this in practical terms, let’s go through the SP500 setup one more time:

 

  1. It just had a text-book bounce off the low-end of my immediate-term 2167-2192 risk range
  2. It’s still signaling bullish from an intermediate-term TREND perspective (2141 support)
  3. It’s likely going to have a big move in/out of the US jobs report on Friday

 

If the jobs number is a bomb (Dollar Down, Rates Down), can stocks rip? Yes. If the jobs number is rainbows and puppy dogs (Dollar Up, Rates Up), can stocks get ripped? Yes. Can anything happen in between? Yes.

 

That’s the point. I won’t get every move right. But, provided that I know where I am in the risk range and what my pending catalysts are (however perverse their outcomes vs. “fundamentals” may be!), the better prepared I am for the un-predictable.

 

Or so me thinks at this stage of my career… Because, guess what? I’ve tried mostly everything else and this is the best I can do, so far, in trying to manage immediate-term risks within the ever bending and trending curve of economic gravity.

 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are as follows:

 

UST 10yr Yield 1.50-1.62% (bearish)

SPX 2167-2192 (bullish)
RUT 1 (neutral)

NASDAQ 5175-5260 (bullish)

XOP 35.99-38.11 (neutral)

RMZ 1 (bullish)

Nikkei 165 (bearish)

DAX 100 (bearish)

VIX 11.25-14.36 (bullish)
USD 93.96-95.98 (bullish)
EUR/USD 1.11--1.13 (bearish)
YEN 99.34-102.45 (bullish)
Oil (WTI) 44.96-49.29 (bearish)

Nat Gas 2.53-2.97 (bullish)

Gold 1 (bullish)
Copper 2.05-2.15 (bearish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bending Bell Curves - 08.30.16 EL Chart


US Equity Beta bounced right where it should have – fairer fight now:

Client Talking Points

EUR/USD

With both the Euro and the Yen signaling immediate-term TRADE oversold vs. the USD, now things get interesting ahead of AUG US economic data; bad data is “good” for stocks don’t forget (i.e. Down Dollar is, short term).

Oil

We’ve been bearish on Oil at the top-end of its current $44.96-49.29 risk range, but there’s no reason why it can’t retrace the top-end of that range if USD sells off (current 2wk inverse correlation is -0.84, so USD matters, short term).

VIX

Front month had its ramp to the top end of its 11.25-14.36 risk range and backed off right where it should have; now we have month-end and no volume (total US Equity Volume -26% vs. the 1yr avg yest); though tape to be short towards 2192 SPX.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/29/16 43% 7% 7% 15% 22% 6%
8/30/16 45% 6% 8% 15% 20% 6%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
8/29/16 43% 21% 21% 45% 67% 18%
8/30/16 45% 18% 24% 45% 61% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

On the other side of the USD expectation, Gold (GLD) lost -1.5% w/w. Again we still like UUP and GLD as a basket against other centrally-planned currency regimes elsewhere.

TLT

Long Bonds (TLT), which has been on Investing Ideas since August 4th, 2014, finished the week -0.25%. We continue to believe that growth is the main catalyst for the curve amidst all the central planning noise. Slower growth gets discounted in a flatter curve so even if rates are hiked into a late cycle slow-down, the yield curve pancakes (the long-end of the yield curve fall and the short-end goes up). 

UUP

Strength in the U.S. dollar, with renewed rate hike expectations back in the mix over the last few weeks, gave a good boost to U.S. Dollar (UUP) which finished +1.1% on the week. The bid-yield of December Federal funds futures has ticked 10 bps higher in August to 0.55% to close out the week.

Three for the Road

TWEET OF THE DAY

NEW VIDEO (1 MIN): Remember What Happened Last Time The #Fed Raised Rates? app.hedgeye.com/insights/53431… @KeithMcCullough pic.twitter.com/iTP0RHygEX

@Hedgeye

QUOTE OF THE DAY

“The best revenge is massive success.”

–Frank Sinatra 

STAT OF THE DAY

Will Fuller had 62 receptions for 1258 yards at Notre Dame last season.


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

The Macro Show with Christian Drake Replay | August, 30 2016

CLICK HERE to access the associated slides. 

 An audio-only replay of today's show is available here.


Remember What Happened Last Time The Fed Raised Rates?

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough reminds investors what happened to markets when the Federal Reserve raised interest rates for the first time since 2006 this past December.


The Handy Hedgeye Health Policy Guide to Key 2016 Election Issues

Takeaway: Party platforms and campaign positions offer a clear view into the areas of agreement and conflict for next 4 years

Labor Day marks the beginning of the end for 2016 presidential campaigns. After Monday, most of the electorate will start to pay attention to the race in anticipation of casting their vote in November. Most of the issues and the candidates' views have crystallized to the point where the options are clearly discernable. In anticipation of the debates that will rage over next several months, we have constructed a couple of handy tables to help compare each of the party and candidate positions on health care issues. With the public exchanges morphing into something different from what the president or his party thought they would be and drug companies like $MYL exhibiting poor political judgment, you can bet health care will be a big part of fall campaigns.

 

Party Platforms. Political party platforms are certainly not what they once were. In the political days of yore, party platforms were hammered out at conventions and represented the goals and intentions of the party and its candidate. The platform consisted of "planks" that articulated the party's position on the issues of the day. Today, party platforms are more aspirational and, by design, more general. The planks articulate not so much the intended administrative and legislative ambitions of the party and its candidate as they give voice to the concerns and interests of the party's base of voters. Platform Committees tend to be made up of party regulars - what Trump and Sanders and their campaigns have referred to as "the establishment." As a result, party platforms do not tend to be very original or innovative.

 

The health care platform for both parties rely on the tried and true messages. Democrats would like to expand health insurance coverage and control premium prices while Republicans would like to see great use of market competition and consumer choice in the health insurance markets. On the issue of prescription drug prices, the parties take nearly opposite stances with Democrats urging the introduction of competitive forces while Republicans seek to reform the regulatory body that oversees approval of drugs for market. On the issue of Medicare and Medicaid, Democrats are quiet while Republicans see major changes to those programs. Table 1, below lists all the major elements of the health care plank included in both parties platforms and approved at their respective conventions.

 

Download both tables below here.

 

Table 1: Health Care "Planks" of Democrat and Republican Parties

The Handy Hedgeye Health Policy Guide to Key 2016 Election Issues - Political Platforms

Source: National Committees of the Democrat and Republican Parties

 

Campaign and House Republican Positions. The candidates' positions on health care issues offer an opportunity for more specificity as they expand on their party's platform. As it happens this election year, the Republican candidate, Donald Trump does not use the "positions" section of his website to offer much in the way of substance. Fortunately, House Speaker Paul Ryan (R-WI-01) had initiated - well before Trump was the nominee - a policy effort known as "A Better Way." The health care policy goals included in "A Better Way" offer more detail than that presented by the Republican nominee and presumably would make their way into the legislative and administrative objectives of a Republican president. We suspect, in fact, that support of the principles of "A Better Way" by Trump was a point of negotiation for Ryan's slow roll of an endorsement.

 

"A Better Way" also provides a good deal of insight into what the bargaining chips would be as a President Clinton attempts to execute on her policy goals. For example, as Clinton seeks to "defend and expand the ACA" she may find support if she is willing to consider greater flexibility for HSA accounts, to use one example. Another deal could be struck between funding the FDA's Office of Generic Drugs and reform of the agency. Table 2. below compares all the policy positions that are likely to impact investors. Included are potentially relevant tickers, if applicable. Issues that would likely to require Congressional action are in bold.

 

Note that the creation of a "public option" would  likely not require legislation. A public option - a government funded or managed insurer that might be similar to state and federal flood insurance programs - is different from a single payer system. A single payer would mean all Americans or residents of a given state would purchase insurance through a, presumably government-run, entity. That government-run insurer would set reimbursement rates for all providers. Neither candidate has expressed support for a single payer system at this point.

 

Beginning in January 2017, states can apply for waivers to create their own mini-ACA. These "section 1332" waivers could include a public option - or in the case of Colorado, single payer - and would, assuming compliance with other parts of the law, gain the support of a Clinton Administration. How likely a state's political leadership is to include a public option will vary depending on the state. Insurers, who in recent years, have taken a political beating in Washington, still have significant influence in the state capitals.

 

Table 2: Health Care Positions of Nominees Clinton and Trump and House Republicans

The Handy Hedgeye Health Policy Guide to Key 2016 Election Issues - CampaignPositions1

The Handy Hedgeye Health Policy Guide to Key 2016 Election Issues - CampaignPositions2

The Handy Hedgeye Health Policy Guide to Key 2016 Election Issues - CampaignPositions3

Source: Candidate and Speaker of the House of Representative websites

 

 

 

 


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