“Don’t tell me what you think, tell me what you have in your portfolio.”
-Nassim Taleb
Oh, Nassim – you sound so hard core sometimes! That’s one of his go-to stinger lines in his latest book, Skin In The Game. He’s speaking to the establishment of academics and journos who neither have capital at risk nor accountability when wrong.
I was on the road all week seeing Institutional Investors in California. While I don’t ask “What’s In Your Portfolio?”, many of our trusting clients often offer up what it is that they’re long and/or short. They want me to tell them where I think they could be wrong.
This is where I think we’re at in this profession. I’ve thought this since starting Hedgeye with my own skin at risk in 2008. It’s not enough to tell me about your “picks” or what you have in your portfolio. What I really want to know is what is your #process?
Back to the Global Macro Grind…
Do you have Amazon (AMZN) in your portfolio? How about Consumer Discretionary (XLY) as your #1 S&P Sector weight? If you didn’t know that AMZN is 20% of the XLY, now you know.
In yesterday’s Early Look, Ben Ryan captured why being long AMZN into the print was a short-term contrarian call (from an options pricing perspective). If you don’t measure and map realized vs. implied volatility relationships every day, you’d have missed that.
I’ll happily admit that part of my #process (when I was running my own fund) didn’t include having a full-time “Volatility Analyst” on my team. Why?
A) I didn’t know I needed one
B) I couldn’t afford one anyway
Evolving your #process is as important as anything in your process. Yes, you are always measuring and mapping ROC (rate of change) dynamics across multiple factors and durations. But, in doing so, you’re constantly learning what does and does not matter.
What does and does not matter usually has to do with the two dirtiest words @Hedgeye: market timing. That’s why most things that work for us have to do with probabilities. Our #process is to constantly question our timing:
A) Are probabilities rising or falling into an event?
B) How is the market positioned for that event?
Here are 3 timely/topical examples of this A/B #process:
- Amazon (AMZN), Facebook (FB), and Netflix (NFLX) into their recent earnings reports
- Global FX positioning into both European Economic data this week and Draghi’s ECB meeting
- Long Industrials (XLI) on “everything is awesome according to my meetings with companies”
On the first part, our @Hedgeye Risk Range product has been signaling to buy-the-damn dips in Bullish TRENDs like AMZN and NFLX for well over a year now. On FB, which is still Bearish TREND @Hedgeye, it was at the LOW-END of the risk range on the day of the print.
If anything is at the low-end of the @Hedgeye Risk Range and your catalyst isn’t bearish, you cover your shorts. That’s just good risk management #process. “Believe me”, I’ve been an active short seller of Bearish TRENDs for almost 20 years now. It works.
How about on Draghi vs. Dollars this week?
- At the beginning of April, net LONG positioning (futures & options) in the Euro vs. the USD was at an ALL-TIME HIGH
- European growth and inflation data had been slowing from cycle peaks for, in some cases, 6 or more months
- Draghi simply acknowledged our #EuropeSlowing view yesterday, and now the Euro has broken bad (Bearish TREND)
Yeah, there are other things going on today in Europe that has EUR/USD ticking down to $1.20:
- France’s Q118 GDP slowed (again) to +2.1% y/y
- Spain’s Retail Sales slowed (again) to +1.5% y/y in MAR
- Spain’s Inflation (CPI) slowed (again) to +1.1% in APR
Is the 6 plus month old news getting priced in? Maybe. Spanish stocks have been making lower-highs since Consensus Macro chased their highs a YEAR AGO this May-June! If “Long Europe” vs. Short AMZN or NFLX was in your portfolio = #NotGood.
Finally on our favorite S&P Sector Short right now, Industrials (XLI):
- US Capex just slowed to +7.0% in MAR from its cycle high of +9.9% year-over-year growth in OCT 2017
- New Orders (Regional Fed Survey) just tanked from their late 2017 cycle peak (see Chart of The Day)
- Capex Plans just rolled over, hard, from their all-time peak in Q417
Do you have big, late-cycle, “globally synchronized” industrial demand in your portfolio? How about Tax Reform? Are you short US Dollars? What will the recent US Dollar Bottoming process do to your international margins and earnings stories?
Don’t tell me about what worked in your portfolio last year. Tell me what risks you currently have in your 2018 portfolio and what exposures your #process is telling you to take out.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.79-3.08% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Industrials (XLI) 72.44-74.90 (bearish
VIX 14.75-19.29 (bullish)
USD 89.91-91.85 (bullish)
EUR/USD 1.20-1.23 (bearish)
AMZN 1 (bullish)
FB 157-175 (bearish)
NFLX 296-345 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
