“It has been a short, restless night, yet I feel wonderfully refreshed.”
-Ken Dryden
That’s one of my favorite lines to one of my favorite sports/life books, The Game, by Ken Dryden. Not unlike how I would like to feel at the top of every risk management morning, this is how Dryden described his sleep after a big NHL win.
In The Game of markets, having big winning seasons are rare. The goal of The Game is to make big losing seasons even rarer. Over the course of a season we grind and we grind. We toss and we turn. Sometimes we get to go to bed early. Sometimes we don’t sleep at all.
But every once in a while we wake up wonderfully refreshed. On those days we should be grateful. Getting paid to play this game at this level is one of life’s great blessings. I hope you have a wonderfully refreshing holiday away from the screens with your loved ones.
Back to the Global Macro Grind…
Done all of that holiday shopping yet? C’mon, let’s get it done today (or tomorrow)! If you’ve procrastinated like I have you’re going to see a heck of a potential buying opportunity in something like Bitcoin today. It’s down over 30% from its week-to-date peak!
Sometimes patience pays. This time it did. I’m still going to wait this Bitcoin thing out. There was something about the Long Island Iced Tea Company (LTEA) going up over +500% pre-market yesterday after changing its name to Long Blockchain that didn’t feel quite right.
Enough about how things “feel.” I’m much more interested in replacing my emotions, politics, religion, etc. with a mathematically driven and repeatable risk management process. I have a few new big ideas being signaled to me on that front this morning:
- Start buying REITS
- Start selling Financials
Not surprisingly, this “buy REITS” (via VNQ in Real-Time Alerts yesterday) came on the heels of the buy signal Mr. Market gave me in Long-term Treasury Bonds (TLT) this week. They’re based on the same signal – an immediate-term #overbought signal in rates.
Just to flush that out a little more broadly with a multi-factor model instead of anchoring on the VNQ #oversold signal itself:
- The Fed raised rates last week
- US Retail Sales, Industrial Production Growth, Existing Home Sales (all NOV readings) ripped post the rate hike
- Q317 US GDP Growth of +3.2% grabbed consensus headlines yesterday
- Oil re-ramped to a lower-high of $58.50 yesterday
- CRB Commodities Index popped to a lower-high of 187 yesterday
- 2yr UST Yield hit higher-cycle-highs up at 1.89%
- 10yr UST Yield tapped the top-end of my refreshed @Hedgeye Risk Range
- REITS (VNQ) prodded the low-end of my refreshed @Hedgeye Risk Range
- Financials (XLF) ripped to the top-end of my refreshed @Hedgeye Risk Range
- All of this happening as the US stock market re-tested her all-time highs
The refreshed part of the risk range #process is the most refreshing thing I can do when I look at a market price. For those of you unfamiliar with my quantitative signal, at its most basic level of construction it’s a 3-factor PRICE, VOLUME, and VOLATILITY model.
Everything beyond that about my market-timing model I have to keep secret, just because I’m such a secretive guy :-)
What is no secret to market history is that both bottoms and tops are processes, not points. That’s why I think I could very well be early in buying REITS inasmuch as I might be right on time.
Since buying REITS (VNQ) isn’t supported by Mr. Market’s current price momentum, my strategy here will be to:
A) Keep 2 Sector Styles I’ve liked for the past 13 months (Tech and Consumer Discretionary) and …
B) Exchange Financials (which we’ve liked since SEP 2017) for REITS
From a bottom up stock picking perspective, two of our in-house favorite REITS are currently:
A) Host Hotels (HST)
B) Pebblebrook Hotel Trust (PEB)
I like those two names in particular because:
A) My long-time partner, Todd Jordan, likes them (and I usually like what TJ likes)
B) Being long the US profit and business cycle remains our Macro Theme and hotel stocks fit that theme nicely
To be clear, being long US RevPar (revenue per available room) #accelerating isn’t a new call by @Hedgeye Risk Management this morning; neither is being long the US Growth & Profit Cycle.
What is new is our call to reverse our SEP-DEC Bullish @Hedgeye TREND view on REFLATION. We’re calling for Reflation Rollover Part Deux in Q1 of 2018 (Part I was when we made that call in Q2 of 2017).
If we’re right, Reflation’s Rollover should, at a bare minimum, stop bond yields from rising at the #accelerating pace we’ve seen for the past 3 months. REITS should stop underperforming Financials like they have for the past 3 months under that scenario as well.
If there’s one thing I love about The Game, it’s finding a new idea to act on. We’ll see if this one is a wonderfully refreshing pivot or not! Again, all my family’s best to you and to yours this holiday season.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.34-2.51% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.05-10.62 (bearish)
USD 92.42-94.15 (neutral)
Oil (WTI) 56.31-58.56 (bullish)
Nat Gas 2.52-2.85 (bearish)
Gold 1 (bearish)
Copper 2.96-3.23 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
