“The word entrepreneur, as it was coined by economist Richard Cantillon, literally means bearer of risk.”

-Adam Grant

Are you an entrepreneur? How about a bearer of risk? Is that risk reputational? Or is it really all yours, in volatility adjusted return terms? Do you lose your business if you are wrong most of the time? What do you win if you’re right?

Yes, this is Wall Street. It’s ok to talk about returns. No matter what your answers are to these questions, I thought Adam Grant did a great job reminding me about reality in a chapter of Originals that he appropriately titled “Creative Destruction.”

If you didn’t know that the Federal Reserve could have destructed the entire edifice of expectations embedded in stock, bond, and commodity markets last week, now you know. An interest rate “hike” into #GrowthSlowing would have revealed plenty of risk.

Bearers Of Risk - yellen frightened

Back to the Global Macro Grind

But you already knew that. There was literally no other call to make heading into last week’s FOMC interest rate decision, other than that Janet Yellen’s Fed would fade. The US Dollar went down on that – rates did too. Stocks, Bonds, Commodities ripped.

Why? On a short-term basis here are some current 30-day inverse correlations vs. the US Dollar Index:

  1. SP500 -0.44
  2. Oil -0.70
  3. CRB Index -0.73
  4. Gold -0.74

And on a -0.7% week-over-week drop in the US Dollar Index (and a -7 basis point drop in the 10yr UST Yield), here were the payouts:

  1. Taiwanese Stocks +5.1% on the week to +13.8% YTD
  2. REITS (MSCI) +3.9% on the week to +11.0% YTD
  3. Utilities (XLU) +3.6% on the week to +17.7% YTD
  4. Gold +2.4% on the week to +26.1% YTD
  5. Oil +2.0% on the week to +2.6% YTD
  6. Copper +1.9% on the week to +2.1% YTD
  7. Italian Stocks +1.6% on the week to -23.2% YTD
  8. CRB Index (19 commodities) +1.3% on the week to +3.9% YTD
  9. SP500 +1.2% on the week to +5.9% YTD
  10. Dow +0.8% on the week to +4.8% YTD

In other words, the closer you were to Down Rates, Down Dollar (on a Dovish Fed), the more money you made.

While it may seem like everyone on Old Wall TV nails it in Dow Bro terms every time the Fed is forced to pivot back to dovish on #GrowthSlowing data, your returns have been higher being longer of Long-term Bonds, Utilities, REITS, and Gold.

That’s right. Both the absolute and relative returns are higher, but so are the risk adjusted (volatility adjusted) payouts. Not to be mistaken for “bad (data) = good” weeks,  on days (like today) when bad = bad, Down Rates, Down SP500 happens.

Another way to express a lower-volatility, higher return portfolio in 2016 has been buying low beta, safe-yielding, stocks. If you look at the mean performance of the top quintile vs. bottom quintile of SP500 companies, here’s that story:

  1. Low-Beta Stocks were up +2.3% last week to +11.8% YTD
  2. High-Beta Stocks were up +0.8% last week to +6.2% YTD

Again. You get it. Everyone was a winner last week, but being long High-Beta lost to those of us who are long Low-Beta. This is called making a conscious portfolio bet that #GrowthSlowing will pay-out Low-Beta, as an investing Style Factor, over the sexier stuff.

Boring or contrarian? Patience or panic? When 2016 finally comes to an end, I think those of you who finish in the Top 10-20% of the alpha generation class will use a few of those words to characterize what differentiated both your process and score.

There is just north of 3 months left in our season. With tonight’s American Political Gong Show pending, I don’t think that -20% weekly drops in US Equity Volatility (VIX) “because the Fed is on hold again” will be the norm into year end.

As opposed to the prevailing panic that “rates are gonna rip”, I think those who chase the US stock market after it moves higher (as opposed to invest in it during its declines), will be the biggest bearers of risk. I bet my business on it, weekly.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.55-1.68% (bearish)

SPX 2114-2181 (neutral)
RUT 1198-1268 (bearish)

NASDAQ 5135-5359 (bullish)

XOP 34.0-37.33 (bearish)

RMZ 1189-1228 (bullish)

Nikkei 160 (bearish)

DAX 10199-10692 (bearish)

VIX 11.35-19.49 (bullish)
USD 94.80-96.25 (bullish)
EUR/USD 1.11--1.13 (bearish)
YEN 100.03-103.17 (bullish)
Oil (WTI) 42.70-46.20 (bearish)

Nat Gas 2.81-3.09 (bullish)

Gold 1 (bullish)
Copper 2.09-2.20 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Bearers Of Risk - 09.26.16 EL Chart