“Time, not space, is the scaling factor.”
-Benoit Mandelbrot
When it comes to economics, is there a deeper simplicity in defining a complex system than that? My man, The Brot, might be 6-feet under, but he’s picking up some serious momentum in our user base! Thanks for all your feedback on his fractal teachings.
“After seasonal adjustments, is there anything in economics like the gulf between the quantum and Newtonian worlds? Do 3 weeks of trading really happen on a different economic planet than 3 days of trading, or 3 hours? Clearly not.” (The (mis)Behavior of Markets, page 169)
This is why I’m constantly trying to contextualize both my fundamental and quantitative research across multiple durations. TRADEs are 3 weeks or less. TRENDs are 3 months or more. TAILs are 3 years or less. And yes, I use the #3 for a reason.
Back to the Global Macro Grind…
Whether you’re looking at a 3 day or 3 hour chart of Oil, you’ll see that Reflation’s Rollover is very obvious across all 3 of my core research and risk management durations.
The commodity market sees it. The stock market sees it. And, of course, the bond market sees it. It’s called inflation expectations falling and, on a TRENDING basis, that currently scores as:
- Crashing Energy Prices (Crude Oil and Natural Gas down -25-30% YTD)
- Energy Related Equities being the worst place you can be in 2017 (XLE -15.0% and XOP -27.1% YTD)
- Long-term Bond Yields Falling with Japanese, German, and US 10yr Yields at 0.04%, 0.26%, and 2.15% this morning
When we write “on a trending basis”, we mean 3 months or more. When something is also bearish on our TAIL risk (3 years or less) duration, we call that a great short.
When something is bearish TRADE, TREND, and TAIL, neither short-term nor long-term investor can ignore the performance pressure. Given that around 85% of US equity daily trading is systematic, TRADE duration price momentum really matters.
While this is obvious on the way down, the exponential scaling factor of price momentum is equally obvious on the way up. That’s why my process goes both ways, and I like it!
A good example of something that fits the opposite of Reflation’s Rollover (i.e. being long REAL US #GrowthAccelerating) that scaled to the upside in a “flat” tape yesterday is Biotech:
- US Biotech Stocks (IBB) were +4.1% on the day vs. Energy (XLE) -1.6%
- IBB is +6.8% in the last week, +8.5% in the last month, and +19.1% YTD
That’s right. If you’ve been going above and beyond the “expensive gets more expensive during US #GrowthAccelerating” Hedgeye Jedi mantra, you went all-in the most “expensive” stocks you can find and bought Biotech stocks that don’t even have earnings.
Put another way, if you bought the latest dip in FAANG, just tell your investors (or spouse or friends) that “I’m long AMZN because it’s cheap relative to some of my Biotech longs … and I like to diversify my growth exposures.”
While that statement might sound as absurd as the legions of Old Wall sayings that have been emblazoned into our profession’s vernacular by broker dealers trying to generate banking and trading fees, I’m cool with it…
For Macro investors, The Scaling Factor of growth and inflation factors slowing and/or accelerating trumps “valuation.”
No, that doesn’t mean we won’t tell you to sell rips after you buy the damn dips in Tech, Consumer Discretionary, and Biotech. Since the title of my note to you on Tuesday morning was “Sell Rips!”, I think I’m crystal clear when I say book some gains.
It simply means that as a lot of people (and I mean a lot!) keep telling you that there’s some magical multiple (or lack of space for these growth accelerating exposures to go higher) out there, I’m going to keep focusing on what matters most: timing.
Again, to make a timing call, we need to have:
A) Fundamental catalysts – ours are still for GDP and PROFITS to accelerate in Q2/Q3 as Reflation rolls over
B) Quantitative catalysts – measured and mapped, daily, within the context of my 3 core durations
C) Patience
While A & B of my ABCs took 19 years to formulate into a repeatable process that I’m crazy enough to try to communicate to you at the top of the risk management morning, C is the one that gets me almost all of the time that I make mistakes.
Especially in times like these where 3 day and 3 hour “routs” and squeezes cluster like bumble bees, having the patience to make good timing decisions within the context of TRENDs and TAILs has never been more important.
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.12-2.23% (neutral)
SPX 2 (bullish)
NASDAQ 6139-6274 (bullish)
XOP 29.79-31.98 (bearish)
VIX 9.98-11.42 (bearish)
USD 96.75-98.10 (neutral)
Oil (WTI) 41.94-45.04 (bearish)
Nat Gas 2.84-3.07 (bearish)
Gold 1 (bullish)
AMZN (bullish)
FB 147-154 (bullish)
GOOGL 950-990 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
