“Having a few good uncorrelated return streams is better than having just one.”
-Ray Dalio
That market practitioner thought about building a portfolio of uncorrelated returns was something that one of Magnetar Capital’s founders, Alec Litowitz, taught me when I became a PM there back in 2006. Prior to that most of my “book” was both concentrated and correlated.
Back then I was still only in my first decade in learning how to risk manage a portfolio. If you don’t think time and experience matters in that seat, that’s going to hurt you, big time, at some point. We live and learn through our mistakes. Long-time investors make many.
Dalio’s pioneering principles associated with diversification go back to the late 1980s when he had what he calls his “Holy Grail” moment of investing. “I saw that with 15 to 20 uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns.” -Principles (pg 56)
Back to the Global Macro Grind…
Dollar Up, Stocks Down? Have you been increasing your asset allocation to US Dollars (and Cash) while reducing your allocation to Global Equities, Credit, and Currencies that are inversely correlated with USD?
That’s what you should be doing when the Global Economy undergoes a @Hedgeye Phase Transition from Quads 1 & 2 towards Quads 3 & 4. As a reminder, in rate of change terms, Quads 3 & 4 both have #GrowthSlowing whereas Quads 1 & 2 have #GrowthAccelerating.
Now if you have friends running portfolios who either don’t measure and map the rate of change data deliberately with discipline like we do or know what the “Quads” are to begin with, they might struggle with making these process driven pivots.
Newsflash: that’s why some PMs just don’t like us! They feel like we’re telling them why they are under-performing.
Many other PMs (Portfolio Managers) love our work and use it to not only augment their ever-evolving investment #process but to crush their competition. After all, Old or New – this is Wall Street. The score always matters. We’re helping PMs win more than they lose.
With the score for Q1 of 2018 already on the board and now the 1st month of Q2 locked in, what should your asset allocations and sub-sector pivots continue to look like as we push through the belly of Q218?
LONGS
1. Commodities (not every commodity and not at any price – buy dips in the ones we like at the low-end of the range)
A) Oil and Natural Gas
B) Ag (Soy, Corn, and Wheat)
C) Lumber
2. US Dollars
3. International LT Sovereign Bonds (not all of them! And, again, not at any price – buy when yields = top-end of the range)
A) German Bunds
B) Italian BTPs
C) UK Gilts
4. US Consumer Discretionary (XLY) and US Energy (XLE) stocks on corrections to the low-end of the @Hedgeye Risk Range
5. Japanese Equities on Yen under-going a Phase Transition to Bearish @Hedgeye TREND
SHORTS
1. Global Equities underweight relative to Commodities and Cash
2. Global FX (pick almost any “EM” currency” and stay with…)
A) Euros
B) Yens
C) Pounds
3. Long-term US Treasuries at the top-end of the @Hedgeye Risk Range
4. US Industrials (XLI), Basic Materials (XLB), Consumer Staples (XLP)
5. Old China exposures (Chinese and Asian EM Equities and Copper in particular)
There’s obviously more to do with specificity within each exposure of long/short ideas here, but I’m confident that our macro #process and pivots will continue to beat Consensus Macro portfolios and positions throughout 2018.
Is it ok to say that? If you’re paying us to help you, I certainly hope so! Again, my goal isn’t to aggravate PMs who haven’t been getting the macro and risk management components of their portfolios right. It’s actually to help them learn and do their jobs better.
At the end of the day, my style may not be for everyone. But results matter a heck of a lot more than me being everyone’s yes-man and brokerage BFF. Thanks to all of you who have had the patience to stick with me and let me evolve alongside you over the years.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.86-3.06% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Energy (XLE) 71.20-74.93 (bullish)
Industrials (XLI) 71.38-74.73 (bearish)
Nikkei 213 (bullish)
VIX 14.61-20.29 (bullish)
USD 90.10-92.35 (bullish)
EUR/USD 1.20-1.22 (bearish)
YEN 107.18-110.33 (bearish)
GBP/USD 1.36-1.40 (bearish)
Oil (WTI) 66.29-68.93 (bullish)
Nat Gas 2.64--2.88 (bullish)
Gold 1 (bearish)
Copper 3.01-3.11 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
