Orthodox Consensus

“To understand why the orthodox theory of financial markets is so flawed, it first helps to review it.”

-Benoit Mandelbrot

Yep. I brought back The Brot! Mandelbrot, that is… to remind us that fading an Orthodox Consensus continues to deliver alpha when it matters most. That was the 6^th big buying opportunity of the last 16 months in long-term bonds, and/or stocks that look like bonds.

And now it’s gone. Poof. Until the next time everyone worries about the wrong thing.

That thing, of course, is the thing that simply has not happened. Rates haven’t been “ripping”, rising, or ramping. They’ve been crashing alongside the rate of change slowing in both US and Global growth. Smile, if #GrowthSlowing is helping you beat your bench!

Back to the Global Macro Grind…

Christian Drake did a nice job reviewing the Orthodox Theory of central economic planning yesterday, so I won’t do that again. It’s been a long, but profitable week. So let’s just finish the week strong, and make some sales.

Sell? If you took the unorthodox route, and faded Fed Fear for the last 3-4 weeks, you’ve been buying and covering every time stocks, bonds, or commodities have hit the low-end of their immediate-term risk ranges. You’ve earned the right to make sales!

So easy a Canadian Hockey player can help you do it. That’s right. Here’s the drill:

1. At the low-end of an immediate-term TRADE risk range, you buy/cover
2. At the top-end of an immediate-term TRADE risk range, you short/sell
3. If the low-end of the range is also a bullish intermediate-term TREND, you buy more aggressively
4. If the top-end of the range is also a bearish intermediate-term TREND, you sell more aggressively
5. If you don’t have multi-factor TRADE or TREND levels, lick your orthodox valuation finger and put it in the wind

‘Oh, but I’m not buying Utilities, KM. My orthodox theory of finance says to buy “cheap” stocks and sell “expensive” ones.’ Ok, I hear you brother. But expensive just got more expensive and cheap just got cheaper (again).

That’s right too. For the month of SEP, where the call was to fade the rate hike fear:

1. Utilities (XLU) are +3.55% for the month-to-date and now leading the league (again) at +17.8% YTD
2. Financials (XLF) are down -2.32% for the month-to-date and still the cellar dweller at +0.67% YTD

Don’t be “up 0.67% YTD.” That is not cool.

Neither is missing a massive move like the one we just saw in rates. At 1.61% on the US 10yr Treasury Yield, that’s a -7-8% decline, in bond yield terms, in what’s been a -29% crash in the 10yr yield in 2016.

And what, precisely, is the catalyst to get the 10yr Yield back up to where it started 2016 (i.e. to 2.27%)? What’s going to get German and Japanese Bond yields to “spike” back into “positive territory”? I hope the bond bear’s answer isn’t “the data.”

Back to what to do this morning:

1. After, as they say on the Old Wall, “putting money to work” getting longer of duration in SEP, I say raise some CASH
2. I’m going to raise my CASH position in the Hedgeye Asset Allocation Model by 31% this morning (rate of change!)
3. Short some cyclicals and industrials in preparation for the #DoubleDipRecession in those sectors
4. In Real-Time Alerts I’m re-shorting Wabtec (WAB) and shorting Industrials (XLI) for the 1^st time in a long time
5. And sell some super long-term bonds (ZROZ) and Gold (GLD) as they tapped the top-end of their range yesterday

I know, going both ways (within the risk range) is quite liberating. It used to be orthodox to “buy low and sell high.” Somewhere amidst the bull though, that discipline has been exchanged for chart chasing. You know, bro - buy high, and hope to sell higher…

I don’t do that.

With everyone and their brother’s sister’s brother “bullish on inflation” again, I wouldn’t be chasing lower-highs in the Fed’s reflation trade either. We get the call on reported inflation rising into year end, partly because we were one of the original firms to make it.

But we’re also the firm that has a predictive tracking algo that reminds us that there won’t be enough reflation of the 2014-2015 deflation to call it an inflation shock. We expect all “inflation” data to make lower-highs, inasmuch as secular growth just did.

No. It’s neither conventional nor consensus to be accurately measuring and mapping the TRENDING rate of change of #TheCycle these days. But it certainly helps to study and review its implications. They’re delivering some serious alpha in 2016.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.55-1.69%

SPX 2115-2190

VIX 11.73-19.29
USD 94.75-96.25
Oil (WTI) 42.67-46.83

Gold 1

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer