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“What matters isn’t what a person has or doesn’t have; it’s what he or she is afraid of losing.”
-Nassim Taleb 

Rule #1 of risk managing macro markets: don’t lose money. Loss aversion is a real factor in decision making. Our #process is designed to get you out of asset classes and sub-sector exposures before their volatility factors break-out to the upside.

A few recent examples of that are Foreign Currencies (via our Bullish US Dollar call) and both Treasury Bonds and their Bond Proxies (Utilities, Staples, etc.). Causal (fundamental) factors like US #InflationAccelerating and #GlobalDivergences drove those calls. 

As Taleb goes on to remind us in his recent rant Skin In The Game: “The more you have to lose, the more fragile you are” (pg 105). Isn’t that the truth? That’s why we don’t want you losing when all of Consensus Macro and their Econs do! 

Back to the Global Macro Grind… 

Missing a move in macro isn’t losing money; being long something that collapses is. That’s why it’s ultra-important to identify why you were making money in something for a long period of time. If those causal factors change, you should be changing your positioning. 

A very recent example of something I missed being loud and long is the Russell 2000. Thankfully, I wasn’t short it. But understanding why I should have been long it is a critical part of my learning process. 

Here are some basic reasons why the Russell 2000 was +1.0% yesterday to a new all-time high: 

  1. From a factor exposure perspective it’s a much purer play on the US domestic cycle than the SP500 is
  2. Throughout Q118 Earnings Season aggregate y/y EPS growth of +42% smoked the SP500’s growth rate
  3. For Q218 Earnings Season, it doesn’t have the “Strengthening Dollar” risk that the SP500 does
  4. Long inflation and rates rising? The Russell has a 25% weight in US Financials and US Energy combined
  5. Long US domestic capex and innovation? 271 of the 1942 companies in the Russell are small/mid cap Tech
  6. Staples and Utilities, combined, are only 4% of the Russell (IWM) 

Since I had all of the components of that right, in addition to being LONG Energy/Tech vs. SHORT Utes/Staples, I should have just been outright long the Russell 2000 from its lows (when it was down YTD) at the end of March. Lesson learned.

Missing something doesn’t mean you can’t capitalize on the opportunity the next time you see the same setup. That’s why experience in this business actually does matter. The more reps, the more you learn. Never be afraid of doing that. 

“So”, as they like to say on the Old Wall, on the next correction to the low-end of the @Hedgeye Risk Range in the Russell (IWM), I’m going to buy it against the SP500 (SPY) on the short side. 

That’s another way to be Long our US Dollar Macro Theme while protecting against one of the biggest causal factors that’s keeping US stocks from going straight down = LATE CYCLE PROFITS #accelerating. 

Will the profit cycle ever slow? If and when it does, how low can the SP500’s EBIT Margin fall from a cyclical high that it has NEVER been able to surpass? As you can see in today’s Chart of The Day, it would have to be “different this time” for that NOT to happen. 

The Top 3 Causal Factors that are already changing that will affect SP500 Earnings are: 

  1. Strengthening US Dollar
  2. Accelerating US Wage Growth
  3. China, Europe, Japan, EM , etc. (Global Growth) #Slowing 

In terms of macro Factor Exposures, what matters most is getting rid of the big ones that are undergoing what we call a Phase Transition from Bullish to Bearish @Hedgeye TREND. 

Our immediate-term Global Macro Risk Range (with intermediate-term TREND views in brackets) are now: 

UST 10yr Yield 2.95-3.12% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7162-7485 (bullish)
Energy (XLE) 74.08-78.87 (bullish)
Industrials (XLI) 70.99-75.76 (bearish)
VIX 12.21-16.56 (bullish)
USD 92.02-93.45 (bullish)
EUR/USD 1.17-1.20 (bearish)
YEN 108.71-110.90 (bearish)
Oil (WTI) 68.76-72.36 (bullish)
Gold 1 (bearish)
AMZN 1 (bullish)
TSLA 278-308 (bearish)
Bitcoin 8104-8995 (bearish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer

Afraid Of Losing? - 05.17.18 EL Chart