“It’s easier to say what it’s not, rather than what it is.”
-Ricardo Semler
The Chairman of Semco Group in Brazil is widely renowned and studied for his unconventional operational philosophy.
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“Many of our basic tenets fly in the face of even the most progressive business owner or manager.” |
There is virtually no hierarchy at Semco. Nobody has a title. And Semler himself claims he doesn’t know what “business” they’re in. His philosophy is that it creates boundaries and restrictions in thought and practice. Pretty unique but also thought-provoking…
At its peak, there was reportedly a 17-month waitlist for the bi-weekly tour of Semco. Each tour could handle 35 outside companies.
Knowledge of its unique culture is clearly well-known. The thought of implementing some of Semco’s principles, however, probably makes most managers squirm.
Back to the Global Macro Grind…
Most of us are compensated to say what it “is”. Why is this market zigging while that one Zags? We’re expected to weigh-in with high frequency when in reality we’re playing a game of unknowns for the most part. “Cause and effect” reasoning can be dangerous.
In our experience, our most astute clients are willing to hear every side of an issue with an open mind because they know that the future is by-in-large unknowable.
When will the market decide FAANG multiples are “fairy dust”? When will these businesses undershoot expectations, experience multiple re-rating, and have a market blow-up? Or when will the fear of lofty expectations matter because much of the volume and daily/weekly/monthly turnover is from automated strategies chasing back-tested factor exposure?.. And are there stronger factors at work right now than “value” multiples? Or do prevailing macro conditions drive sector and factor outperformance? I sure can’t answer all of these questions with confidence…
The best we can do is to build an ever-evolving system to assign probabilities that are based on both bottoms-up modeling of the economy and risk management intelligence.
The core FAANG stocks helped take the tech-heavy vehicles down yesterday. The Nasdaq 100 got hit for -1.73% vs. -4bps for the S&P 500, and the VXN built its premium again to VIX very quickly. Within our framework, this dispersion in anything heavily-weighted to the FAANG was not “out of nowhere”.
We covered our risk management view of this pocket of the market in Tuesday’s Early Look:
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“One of the most ‘expensive’ mega cap stocks in US history got +23% more expensive in the last month alone…. You don’t chase this market and its FAANG components after the latest move. The whole point about buying these damn dips is that you get to hedge your gains by selling the rips.” |
When we look at our core, multi-duration signaling model next to explicit consensus probabilities gleaned from derivatives markets (think of the implied volatility premium factor), the squeeze in the FAANG components followed a familiar pattern of a stock that gets overbought within a BULLISH trend:
- A single security reaches the top-end of the @Hedgeye Risk Range
- Sizable implied volatility PREMIUMS grind into DISCOUNTS as volatility expectations compress
- Market beta has follows a similar pattern to “1)” & “2)”
As we show in the Chart of the Day (Our FAANG Factor Depth Monitor), the core FAANG components are still above their intermediate-term TREND lines of support and approaching the low-end of their immediate-term risk ranges.
The point of referring back to our Early Look from Tuesday morning is not to say we nailed the unknowable in hindsight. You could easily do some reading and find out we don’t “nail-it” perpetually. The point is to highlight two things:
- Our risk management playbook changes short-term, and it’s a daily model refresh to arrive at the important call-outs. We try to communicate the key takeaways as clearly as possible.
- We don’t call tops and bottoms or go through media-entertaining scenarios. We follow our economic modeling and longer-duration signaling lines to try and catch the meat of prevailing macro trends.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.31-2.41% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Nikkei 222 (bullish)
DAX 127 (bullish)
VIX 8.90-11.88 (bearish)
USD 92.50-94.36 (neutral)
EUR/USD 1.16-1.19 (neutral)
YEN 110.68-113.16 (neutral)
GBP/USD 1.32-1.34 (bullish)
Oil (WTI) 55.69-59.40 (bullish)
Nat Gas 2.94-3.22 (bullish)
Gold 1 (bearish)
Copper 3.02-3.12 (bullish)
Good Luck out There,
Ben Ryan
Macro analyst
