Quad 4 Edge

“After more than 50 years as a money manager, the surest way to get rich is to play only those gambling games or make those investments where I have an edge.”
-Edward O. Thorp

If you’re looking for both a great read and a data-driven-process-oriented investor with returns that will rival anyone you look up to in this profession, read Ed Thorp’s life story: A Man For All Markets.

It’s been a great year for our firm. We have a tremendous amount to be grateful for. Happy Holidays to you and your loved ones,

KM

Back to the Global Macro Grind…

My edge is my macro process. If it wasn’t, we wouldn’t have successfully made the turn from Quad 2 to Quad 4 like we did in September. At some point, I get that our edge will be arbitraged away by The Machine…

Until then, let’s keep saving and making money. 

It may be the Holiday Week but it’s still Macro Monday @Hedgeye! For those of you who are new to our process, on the 1^st day of every week we measure and map what markets did week-over-week within the context of our multi-factor and multi-duration macro views.

Let’s start with the Global Currency market:

1. US Dollar Index corrected -0.5% last week to +5.2% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD bounced +0.6% last week to -5.3% YTD and remains Bearish TREND @Hedgeye
3. Canadian Dollar dropped another -1.6% vs. USD last week to -7.6% YTD and remains Bearish TREND @Hedgeye
4. British Pound bounced +0.5% last week to -6.4% YTD and remains Bearish TREND @Hedgeye
5. Australian Dollar dropped another -1.8% vs. USD last week to -9.8% YTD and remains Bearish TREND @Hedgeye
6. Russian Ruble continued to crash, down -3.9% vs. USD last week to -16.4% YTD and remains Bearish TREND @Hedgeye

During a Global Quad 4 Deflation of asset prices, aren’t you glad you’re not long Oil, Energy Stocks, or Russian Rubles? 

Energy Stocks (XLE) led losers during the US stock market crash (greater than 20% drop from peak) of last week: 

1. Energy Stocks (XLE) were down -9.6% last week to -22.3% YTD and remain Bearish TREND @Hedgeye
2. Industrials (XLI) were down another -7.2% last week to -17.7% YTD and remain Bearish TREND @Hedgeye
3. Tech Stocks (XLK) were down another -8.3% last week to -7.4% YTD and remains Bearish TREND @Hedgeye 

If you have friends who are down -17.7 to 22.3% YTD, they obviously didn’t have the Quad 4 Edge embedded in their market expectations. If you have friends who sold all of their Long Tech exposure pre the NASDAQ crashing -21.9% from AUG, they crushed it. 

That’s right. Some people absolutely crushed it this year by simply being data dependent. You could have stayed long US Growth, Momentum, and High Beta stocks for the 1^st 7-8 months of the year, then re-allocated all of those gains into Treasuries: 

1. UST 2-year Treasury Yield dropped another -9 basis points last week to 2.64%
2. UST 10-year Treasury Yield dropped another -10 basis points last week to 2.79%

That was the 6^th week in the last 7 where long Treasuries (across the curve) got you paid in asset allocation terms. None of my friends who follow the 4 Quadrant GIP (Growth, Inflation, Policy) process have lost money during Quad 4 in Q4 of 2018. 

In addition to the aforementioned Top 3 US Equity Sector Underweights during Quad 4 (Tech, Energy, and Industrials), the following Factor Exposure Underweights did the following last week: 

1. HIGH BETA Stocks were down another -7.8% last week, crashing -24.8% in the last 3 months
2. TOP 25% SALES Growth Stocks were down another -7.9% last week and are down -19.1% in the last 3 months

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies 

Despite some Old Wall spin out there that “Emerging Markets have started to outperform”, both they and Commodities have been terrible places to have had your money in 2018:k

1. Emerging Market Stocks (MSCI Index) was down another -1.5% last week to -17.4% YTD and remain Bearish TREND @Hedgeye
2. Commodities (CRB Index) was down another -4.5% last week to -11.2% YTD and remain Bearish TREND @Hedgeye

Yes, while it’s true that EM and Commodities went down less than the Russell 2000 (down another -8.4% last week taking its crash to -25.7% since AUG end) last week, they still went down! The surest way to stay rich is to not lose money when everyone else does.

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

UST 10yr Yield 2.73-2.93% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.85-57.35 (bullish)
Consumer Staples (XLP) 49.36-53.72 (bearish)
REITS (VNQ) 73.46-81.98 (bullish)
Industrials (XLI) 61.05-68.08 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 20105-21608 (bearish)
DAX 105 (bearish)
VIX 19.21-31.68 (bullish)
USD 95.70-97.63 (bullish)
EUR/USD 1.12-1.14 (bearish)
YEN 110.80-114.12 (bearish)
GBP/USD 1.25-1.27 (bearish)
Oil (WTI) 44.04-49.72 (bearish)
Nat Gas 3.31-4.43 (bullish)
Gold 1 (bullish)
Copper 2.63-2.75 (bearish)
Corn 3.71-3.88 (bearish)
AAPL 149.37-173.12 (bearish)
AMZN 1 (bearish)
FB 123-139 (bearish)
GOOGL (bearish)
NFLX 238-276 (bearish)
TSLA 300-348 (bearish)
Bitcoin 3001-4210 (bearish)

Best of luck out there today and Happy Holidays,

KM

Keith R. McCullough
Chief Executive Officer