“There were only two big forces to worry about: growth and inflation.”
-Ray Dalio
When it comes to getting my asset allocations and long/short positioning right, I’m in good company focusing on the rates of change in growth and inflation. Many managers don’t look at the world this way. We should all be grateful for that! We need someone to beat.
Back to the Global Macro Grind…
Today is Day 2 for me on the road with Darius Dale and Ryan Fodor in Texas. We spent all of yesterday in Houston talking to Oil & Gas PMs and their analysts. Today we’ll be in both Austin and Dallas. If you ever want to meet with us when we’re down here, let us know.
Yesterday I also hit the BUY signal button in Real-Time Alerts in what’s become one of my favorite US Equity Sector Styles: Energy (XLE). On the lows of the day both the commodity (Oil) and the Sector ETF were signaling immediate-term #oversold.
Why buy the stocks instead of the commodity?
A) Buying the stocks isn’t as consensus as owning the commodity (I can always buy the commodity on another day)
B) I’d been waiting patiently for an #oversold signal in Energy (XLE) and it was -1.8% on the day
Bottom line is that I like both. I’m warming up to buying Natural Gas (UNG) too. Unfortunately it didn’t signal immediate-term #oversold yesterday (Natty’s @Hedgeye Risk Range = $2.68-2.89). If it did, the market-timing #process would have had me signal buy there as well.
“Market-timing”, “Rates of Change”, “Playoff Hockey”… loving these things makes me a devilish mucker to some on the Old Wall who have been praying for Hedgeye’s demise for a decade now. Cheers to all of them!
That was Mucker with an M.
For those of you who subscribe to my market-timing product (Real-Time Alerts), you know that I’m also short Long-term Treasuries via the TLT. Formerly known by long-time subscribers as the “Tizzle” (when we liked it on the long side in 2015-2016), I go both ways there.
Having the mental flexibility to go both ways (long and short, baby) isn’t an emotional thing. It’s a rate of change thing:
A) When both GROWTH and INFLATION are #slowing at the same time (we call that Quad 4), you buy the TLT
B) When both GROWTH and INFLATION are #accelerating at the same time (Quad 2), you short the TLT
Our process is patient. And it’s also catalyst driven. Shorting Long-term Treasuries (TLT) at the end of last week had 3 catalysts:
- If Powell is data dependent, he should be hawkish on inflation at today’s FOMC meeting
- I think Friday’s US jobs report will continue to show US Wages #accelerating
- UST 10yr Yield has immediate-term upside to a fresh YTD high of 3.06-3.08%
The #1 risk to being Long Energy (XLE) and Short Long-term Treasuries (TLT) is the same thing = Inflation Slowing. If our #process was measuring and mapping that the probability of that outcome was rising, I wouldn’t have these positions.
If you don’t do FX (Long Dollars) or Fixed Income (Short Treasuries), two other US Equity Long/Short setups we still like are:
A) Long Energy (XLE) vs. Short Industrials (XLI)
B) Long Consumer Discretionary (XLY) vs. Short Consumer Staples (XLP)
If you’re a generalist long-only US Equity PM, those “overweight” vs. “underweight” tilts have you crushing your competition so far in 2018. If you’re a USA only long/short manager, the alpha you are delivering should be youge relative to hedgies who are still long of the “Globally Synchronized Recovery.”
As we men and women of hockey gridiron like to say, crush or be crushed.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.89-3.06% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Energy (XLE) 72.50-74.55 (bullish)
Industrials (XLI) 71.01-74.50 (bearish)
VIX 14.57-19.24 (bullish)
USD 90.25-92.51 (bullish)
Oil (WTI) 66.45-68.99 (bullish)
Nat Gas 2.68--2.89 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
