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The Call @ Hedgeye | March 28, 2024

“Our business here is prosperous and I have every reason to hope to be entirely above the frowns of the world.”

-Ulysses S. Grant

Even though the timing of his hope was ill placed in 1860, that was one of my favorite quotes from a thick 19th century US History book I just finished reading: American UlyssesA Life of Ulysses S. Grant.

What is your business right now? Is it frustrating or prosperous? I realize that your P&L is going to be part of your answer, but what I really want to know is whether you’re doing what you love and building something that will outlast your years?

Especially in our profession, the frowns of the world are manifest. For the last 9 years I’ve thought that there’s tremendous opportunity in that. There’s a better way. In fact there’s a way better way. So let’s embrace that opportunity as our growth accelerates.

Frowns On Growth Expectations - grant white house

Back to the Global Macro Grind

Darius Dale and I spent all of yesterday meeting with Institutional Investors on Boston. Some have been capturing huge returns associated with the last 4-6 months of US Growth Accelerating. Some are still fighting it. Some are somewhere in between.

But if you really think about it, there’s little to no value in my small-sample-size-sentiment-check. What you should really care about is both the positioning of the macro marketplace and implied concerns and complacencies.

Implied concerns are easy to see – just look at these implied volatility premiums:

  1. Nasdaq’s (NDX) implied volatility premium (vs. 30-day realized) has ramped back up to +71.4%!
  2. Tech Sector ETF’s (XLK) implied volatility premium (vs. 30-day realized) is back up to +54.3%
  3. Consumer Discretionary’s (XLY) implied volatility premium (same duration) is still high at +39.3%

So, that’s partly why (as the US stock market rallied intraday “off the lows” yesterday), Tech and Consumer Discretionary outperformed. The “Valuation” Bears continue to short these sectors, whereas the Hedgeye Growth Bulls are buying every dip.

Implied complacencies don’t come from someone’s “surveys” – they’re implied here:

  1. Copper’s (JJC) implied volatility DISCOUNT (vs. 30-day realized) is still -17.5%
  2. Weat’s (WEAT) implied volatility DISCOUNT (vs. 30-day realized) is still -15.5%
  3. Utilities’ (XLU) implied volatility DISCOUNT (vs. 30-day realized) is still negative at -2.9%

So, those are all on my SELL list… not only because complacency is fact (i.e. when the market isn’t implying a correction, the probability of a correction rises) but, more importantly:

A) Our research process has been bearish on #GrowthSlowing asset allocations (TLT, ZROZ, XLU, etc.)

B) Reflation’s Peak (Q117 Macro Theme) might very well be what we thought it could be!

This is one of the new ways I think that we can make what we do better and better – adding more and more factor-based-analysis to our fundamental research process. The opportunities for improving on this front are mind bending.

That’s right. During the blizzard, this East Coast guy is going to be bending his friggin’ mind!

“Do you want to build a snowman?”

“It doesn’t have to be a snowman”

“Go away”… “Okay bye”

As in BUY US GROWTH already.

And stop playing that damn song (I have 3 girls and Frozen is belting out of our living room right now) about the “soft data” (newsflash: it leads the hard data) or whining about the “curve flattening”!

Btw, now that every bear and their brother was talking about those 2 things in particular:

A) The curve is steepening again (10s/2s spread +10bps from the FEB low to +124bps wide)

B) Only once in the last 30 years, has the soft data materially diverged from the hard data

Part B is only new to people who haven’t studied US market and economic history. That’s not something new coming out of Hedgeye’s process this morning but it’s certainly something we can get better and better at too.

In terms of bettering the market’s positioning for US #GrowthAccelerating, someone big – I mean someone youge out there, and you know who you are – should buy the living daylights out of Russell 2000 futures already!

The latest non-commercial CFTC futures & options positioning revealed a spanking brand new net SHORT position in Russell 2000 (mini) of -10,317 contracts (after getting -31,761 contracts SHORTER) last week.

Whether consensus wants to admit it yet or not, the frowns on US growth expectations remain glaringly obvious.

Our immediate-term Global Macro Risk Ranges (with TREND views in brackets) are now:

UST 10yr Yield 2.48-2.65% (bullish)

SPX 2 (bullish)
RUT 1 (bullish)

NASDAQ 5 (bullish)

VIX 10.53-12.35 (bearish)
USD 100.70-102.40 (bullish)
Oil (WTI) 47.16-51.04 (bearish)
Copper 2.53-2.67 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Frowns On Growth Expectations - 03.14.17 EL Chart