Complacency and/or Capitulation?

“I never thought of losing, but now that it’s happened, the only thing is to do it right.”

-Muhammad Ali

The first “retired” partner in Hedgeye history (the great Moshe Silver) gave me this massively youge and very heavy Muhammad Ali book as a gift for my office. Very few famous professional athletes have both the breadth and creativity in their quotes as Ali did. I love good quotes.

Complacency and/or capitulation? That one-liner got some fans yesterday, so I’m going to try to string another day out of it! If you’ve been crushing it this year (buying every damn dip), the latest 4-day rally off another “Trump” higher-low, may render you complacent right now…

And if you have friends in this business who are getting crushed, the recent ramp may very well have them in the capitulation camp. What if the bears are going to be right for more than a few days? Covering their shorts here means they don’t get paid on that down move anyway.

Back to the Global Macro Grind…

Complacency and capitulation are not things I personally strive to achieve. That said, I’ve obviously been smoked in macro markets being both at times in my career. Once it happens, the only thing to do is to be accountable to my team and learn from it.

Sadly, I don’t see a lot of self-effacing commentary from buy-siders who have been crushed by their political and/or market views this year. On the sell-side, one of our main competitors’ response to being bearish on growth for the last 6-7 months has been “oh, you just wait.”

Gee, thanks.

The main goal of this profession is to not have major draw-downs so that you can be there, riding a wave of alpha when you get something really right. Letting winners run is a lot easier said than done. Riding losers just makes you a loser.

If you want to be bearish on something that’s actually been making you money for the last 3 months, stay with Reflation’s Rollover:

1. CRB Commodities Index (19 commodities) is down -3.8% in the last 3 months
2. Energy Stocks (XLE) are down -6.0% in the last 3 months
3. WTI Crude Oil is still down -7.8% in the last 3 months
4. Silver is down -5.2% in the last 3 months
5. Copper is down -7.0% in the last 3 months
6. Soybeans are down -7.7% in the last 3 months

I’m not cherry picking. If I was I’d have started with Coffee prices being down -17.3% in the last 3 months and Starbuck’s (SBUX) investors who are long the other side of inflation expectations falling (i.e. real consumption growth accelerating) being +7% in the last 3 months.

I realize that 3 month returns are “short-term” within the context of how many money managers define their investment duration. But everyone reading this knows that your latest 3-6 months of performance matters, a lot.

On a 6 month return basis, for those of your competitors who have been in the “oh, you just wait camp”:

1. Nasdaq is +19.0%
2. Consumer Discretionary (XLY) is +11.0%
3. SP500 is +10.2%

And if you’ve been waiting for complacency to set into those fancy returns, we finally have some hard data to support that:

1. Nasdaq just flashed its 1^st implied volatility DISCOUNT (vs. 30-day realized) at -3% yesterday
2. SP500 is registering day 2 of having an implied volatility DISCOUNT at -5%
3. Consumer Discretionary (XLY) is knocking on uber complacency’s door with an implied vol. premium of +0.2%

Uber? To be fair, that’s an exaggeration. What is very uberly uber is the Financials (XLF) flashing an implied volatility DISCOUNT Of -18% this morning! No, that is not a buy signal. That’s why I covered my TLT short and sold some bank exposure in Real-Time Alerts yesterday.

And again, for those of you who are new to considering my risk management process, it’s never “just one thing” or one guy or gal’s “signal” that makes for a “market call.” Across multiple factors and durations, it’s the collective process of measuring and mapping all things.

Whether you’ve been bullish or bearish… whether you might be complacent or capitulating… right now all that matters is making the next good decision in your portfolio. Now that all of this has happened in the last 6-7 months, “the only thing is to do it right.”

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

UST 10yr Yield 2.18-2.41% (bullish)

SPX 2 (bullish)

NASDAQ 6050-6204 (bullish)

XOP 33.95-35.98 (bearish)

Nikkei 190 (bullish)

DAX 126 (bullish)

VIX 9.06-15.40 (bearish)
EUR/USD 1.08-1.12 (bearish)
YEN 110.00-114.66 (bearish)

GBP/USD 1.28-1.30 (bullish)

Gold 1 (neutral)
Copper 2.48-2.60 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer