The Temperament of Alpha Generators

“Temperament is the great separator.”
-Richard Neustadt 

I’ve seen a lot of people come and go in this profession. Alpha generators come with all types of temperaments. But the ones with the longest staying power have a #process that risk manages the reality that we are all emotional and flawed human beings. 

In the aforementioned quote, Neustadt was talking about Presidential leadership. Doris Kearns Goodwin picked up on that point in her new book that I just finished (must #history read), Leadership In Turbulent Times, with a short story about FDR: 

“Four days after Franklin Roosevelt took the Presidential Oath in 1933, he paid a call on former Supreme Court Justice Oliver Wendell Holmes, who was celebrating his 92^nd birthday. After Roosevelt left, Holmes famously opined: A second-class intellect. But a first-class temperament.” (pg 43) 

Back to the Global Macro Grind… 

As I’ve been trying to prove all my life, you don’t have to have the absolute highest intellect to be successful. You don’t have to be the smartest person in the room. Being smart enough works, especially if you outwork people. 

But outworking your competition is never going to be enough. Working within a disciplined but flexible decision making process that’s constantly allowing you to, and sometimes encouraging you to, change your mind and positioning is critical. 

Dogma, ignorance, and/or unawareness have always been the death-knell of alpha generation. Not ironically, it’s some of the “smartest” people I’ve ever met who just couldn’t risk manage their own minds. They’ve moved onto doing other things now. 

And, God willing, we data dependents move on to grinding it out for another day… 

First on a real-time US stock market update: 

1. Yesterday was Day 2 of the US stock market bounce off of Friday’s immediate-term TRADE #oversold signal
2. For the SP500 it was only the 3^rd UP day in the last 11 trading days
3. The bounce was to lower-highs on #decelerating volume
4. Total US Equity Volume was DOWN -16% vs. it’s 1-month average
5. Implied Volatility (IVOL) for SPY came DOWN from a +40% PREMIUM (vs. 30-day realized) to +9%
6. The refreshed @Hedgeye Risk Range for the SP500 is now = 2
7. Energy (XLE) was +0.7% on the day (beating the market) vs. Industrials (XLI) -0.8%
8. One of our favs since SEP 2018, Utilities (XLU) closed at yet another all-time high 

How can I write all of that down in less than 6 minutes without reading it somewhere in Old Wall Media? That’s the easiest part of my job. I write these things down in my notebook (before I go to bed) every market day of my life. 

Again, if you accept that you’re not the smartest person on the planet, you’ll humbly submit to being radically data-dependent. Where I grew up, doing a job right was not only a matter of pride, but the only route to recurring compensation. 

Do you wake up every market morning aware of everything that’s already been (legally) reported to the world? That’s humanly impossible. But you can get close. And your “game time” awareness can certainly be a lot higher than your competition’s. 

On the fundamental research side, were you ignorant or aware of the facts that: 

1. The US INFLATION Cycle was peaking in Q3 of 2018 and that US interest rates should peak shortly thereafter?
2. The US PROFIT Cycle was peaking in Q3 of 2018 and that US stocks would crash shortly thereafter?
3. The US Global GDP Cycle was peaking at this time (Q1 of 2018) last year? 

While we weren’t “100% sure” any of these things would happen, we were aware that the probability was rising that they’d happen. As each market day of data and market returns were reported, our conviction in our probable outcomes rose. 

Did your competition get all three of those fundamental realities right? If they didn’t: 

1. They stayed short Treasuries in both Q4 of 2018 and Q1 of 2019, missing a massive asset allocation opportunity
2. They didn’t buy Treasury Bond Proxies (Utes, REITS, etc.) and wore epic draw-downs in profit expectations in OCT-DEC
3. They’re still hoping the China, EM, and European Equity longs they bought at this time last year get back to break-even 

In other words, if you could have been accurately aware rather than dogmatic and ignorant, you would have been. So keep it here, Jedis of the grinding #process revolution. We stand ready this morning, working right alongside you. 

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

UST 10yr Yield 2.58-2.69% (bearish)
UST 2yr Yield 2.41-2.52% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.31-58.55 (bullish)
REITS (VNQ) 83.25-85.76 (bullish)
Housing (ITB) 33.79-35.50 (bullish)
VIX 13.51-17.71 (bullish)
USD 95.85-97.84 (bullish)
EUR/USD 1.11-1.13 (bearish)
Oil (WTI) 55.46-57.90 (bullish)
Gold 1 (bullish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer