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“How the heck do I know how he does it?”
-Cecil Simmons 

You don’t remember ole Cecil? He was the pit boss back in the 1960s at the Desert Inn (Las Vegas). I can assure you that A Man For All Markets (Ed Thorp) knew him. He was one of the guys Thorp was front-running for financial gain.

Cecil went on to complain to the Sands Casino manager that “I guess he’s got one of them mathematical minds or photographic memories, or something… and he wrote a book that teaches everyone how to win.” (pg 108) 

60 years later you can hear a version of this conversation between Captain Stock Picker and the Managing Partner of a hedge fund. If they haven’t evolved their game using modern mathematical tools like predictive tracking algos, that is. 

Back to the Global Macro Grind… 

Man vs. The Machine - zcas

“I’m just telling you this book-learning SOB ruined us… we’re out of the blackjack business.”
–Cecil (A Man for All Markets, pg 108) 

Yesterday I had a meeting with one of the hedge fund industry’s best asset gatherers. He’s been a partner at a few high profile hedge funds that launched with a lot of money. Some of those funds aren’t around anymore. 

His number one complaint about one of the PMs (Portfolio Managers) he partnered with was: 

“He’s a great stock picker, but had no macro or market timing process. He didn’t understand The Machine and, most importantly, didn’t find ways to change or augment what used to work.” 

In other words, he was a really smart guy who wasn’t smart enough to change as The Game changed. 

I’m not telling you this story to pick on the poor (really rich) guy. I’m using the mathematical (card counting with 1 deck) analogy to remind you that there’s a massive opportunity for you to generate alpha right now using The Machine

Think of The Machine as the dealer. While its short-term moves are non-linear, it’s rules based and predictive in terms of its behavior. All the while, you can tilt the odds in your favor when the dealer of 85-90% of daily trading has a hot deck. 

Captain Stock Picker (my former self as a buy-side analyst) is one of many in an oversupplied industry of analysts who can and will make a lot of mistakes by simply not knowing the rules of The Game or The Machine

He or she buying/selling too early on the other side of you = perpetual alpha generating opportunity. 

The title of this morning’s Early Look was inspired by a former Captain Stock Picker himself (we’re the same age) who was a partner at one of the world’s largest hedge funds, and now has his own fund… 

His fund is neither new nor one of the hedge funds that got smoked last year. 

He’s simply one of the growing number of men and women that I continue to meet that have decided to evolve what used to work with data-driven tools and models. These are the guys and gals who are beating The Machine by using it. 

Anyway, that was a rant… 

As always, thanks for reading my notes. An addendum to the aforementioned analogy is the knife fight that I’m seeing develop here in the Vol Pit. 

What’s a knife fight? It’s a market that chops people up. I personally do best in knife fights that A) are occurring within developing Bearish @Hedgeye TRENDs and B) are signaling a series of lower-highs but higher-lows. 

Let’s use the SP500 as the simplest example with the Vol Pit being front-month VIX: 

  1. SP500 Bearish intermediate-term @Hedgeye TREND resistance = 2721
  2. Immediate-term @Hedgeye Risk Range = 2
  3. Low-end of range = higher-low, -3.0% below yesterday’s close
  4. Top-end of range = lower-high, +1.3% above yesterday’s close
  5. IVOL -38% (discount) vs. 30-day realized with a range of -49% to +18% (premium) 

Like any card-counter who is waiting for the deck to be hot (lots of face cards left): 

  1. I buy/cover when the market price is at the low-end of the range and IVOL +18% (DEC 24, 2018)
  2. I sell/short when the market price is at the top-end of the range and IVOL -49% (JAN 18, 2019)

Since there is no more time or space to explain this further this morning, if you want to know how I do it, I humbly submit you meet with us so that we can try to help you use The Machine to beat the market more than it beats you. 

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

UST 10yr Yield 2.63-2.79% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
VIX 17.12-23.50 (bullish)
USD 94.80-96.35 (bullish)
EUR/USD 1.12-1.15 (bearish)
Gold 1 (bullish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Man vs. The Machine - Chart of the Day