When Losers Win

“I think I was truly born to thrive in hostile environments.”
-Baker Mayfield 

When the Jets went up 14-0 against the Browns last night, I wouldn’t characterize the Cleveland fans as hostile… but they were definitely feeling like my personal accounts have this week. My performance has been horrendous. 

Then their 1^st overall 2018 NFL Draft Pick came into the game … and, oh boy, did that entire team and stadium come to life. Say what you will about Baker Mayfield’s leadership style, but please focus on his results. 

That was the 1^st Cleveland Browns win in 685 days. If I was that bad for that amount of time, I wouldn’t be gainfully employed and able to write to you this morning. So thanks for putting up with me for the last 5. I’ll do better. 

Back to the Global Macro Grind…

The European and Emerging Market economic data continues to slow this morning, but no worries… losers are going to be winners for at least another day this morning. And no I’m not calling Mayfield a loser! He’s my kind of winner. 

Another big time constituency of winners have been American Workers in 2018: 

1. US Jobless Claims just hit a 2,548 week low
2. US Jobless Claims are the lowest since 1969
3. Those claims represent 0.07% of the Total US Civilian Population 

Yep, put that in your Trump #TradeWar political-fear-pipe and smoke it (Mayfield might say something like that to the other teams fans btw). Points 1 and 2 aren’t typos – 2,548 weeks is a lot longer than 685 days! 

US labor force data #accelerating to #PeakCycle levels like this is, of course, the latest of late-cycle indicators. That said, it doesn’t mean the data (or the US Growth Bears of the last 2 years) ceases to exist. 

What the recent US employment and #accelerating Wage Inflation data hopefully does is remind you which economists and strategists were the real losers for the last 9 quarters of US GDP Growth #accelerating. 

Having been in Quad 2 (GROWTH and INFLATION #accelerating, at the same time) isn’t an opinion – it’s an economic fact. If your portfolios looked like this for the last 9 quarters (36 months, 1,080 days): 

1. You’d have had MAX Gross Exposure and WIDE Net Exposure to both US Equity Beta and Credit
2. You’d have been SHORT US Treasuries, across the curve
3. Top 3 US Equity Sector Overweights: Tech, Consumer Discretionary, and Industrials
4. Top 3 US Equity Sector Underweights: Utilities, REITS, and Consumer Staples
5. Equity Style Factor Overweights: Momentum, Growth, and High Beta
6. Equity Style Factor Underweights: High Dividend Yield, Low Beta, and Value 

… well, you’d look more like the New England Patriots have for the past few years. 

Again, these aren’t opinions. They are facts. It would be nice to see those that completely missed it have the accountability that the rookie 21 year old New York Jets QB, Sam Darnold, did blaming himself for last night’s loss. 

I have no one to blame but myself for my losses being long US Dollars and the Long Bond this week either. If I was early shorting Quad 4 exposures, it actually could have been a lot worse. 

Since I’m not yet outright short most of what I will be as we enter Quad 4 in Q4 (Tech, Consumer Discretionary, Momentum, etc.), so far I only got tagged coming back to the short side of Industrials (XLI) a little too early. 

Whether on the field of competition or in the P&L, being early can easily be translated to losing and/or being wrong too though. It’s uncanny how Mr. Market constantly pounds that into my p.a. 

So I stand (literally, standing desk here in my office) here before you not feeling shame or anything like that. I’ve had plenty of losses to deal with in my life. To the contrary, I stand ready to win next week. 

Given my positioning, that will be tough as: 

1. USA’s Quad 2 doesn’t end until the end of next week
2. It’s both month and quarter-end where 2018 losers can continue to bounce 

As tough as The Game always is though, I’ll have to: 

1. Maintain my repeatable process and…
2. Be patient with it 

Almost 20 years into this, I’ve had to learn those lessons multiple times over too. In order to get the next 2-4 quarters and 60-120 days more right than wrong, sometimes you have to be a little early. 

What was most interesting yesterday was that some of the Quad 4 LONG exposures already were. Consumer Staples (XLP) was actually the #1 Sector Style to be long at +1.25% on the day with the SP500 making an all-time high. 

I was able to buy REITS (VNQ) on sale in the morning after selling them on an immediate-term TRADE #overbought signal back in mid-AUG too. REITS (VNQ) ended up closing up +0.8% (in line with the SP500) on the day. 

After getting knocked flat on my back for the 4 days prior, it was good to get a few 1^st downs doing what my playbook says I should do. There’s no need to panic. Patience will be a core #process holding as we head into October-November. 

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

UST 10yr Yield 2.90-3.10% (neutral)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Utilities (XLU) 53.07-55.17 (bullish)
REITS (VNQ) 82.01-83.98 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 223 (bullish)
DAX 114 (bearish)
VIX 11.16-14.57 (bullish)
USD 93.40-95.67 (bullish)
EUR/USD 1.15-1.18 (bearish)
YEN 111.00-112.93 (bearish)
GBP/USD 1.29-1.32 (bearish)
Gold 1194-1213 (bearish)
Copper 2.60-2.81 (bearish)
Corn 3.36-3.60 (bearish) 

Best of luck out there today,
KM 

Keith R. McCullough
Chief Executive Officer