“Betting on a hedge I had researched was like betting on a Blackjack hand where I had the advantage.”
-Edward Thorp 

For the former hedge fund manager of Princeton Newport Partners (PNP) that was what Thorp called a “revolutionary idea when we set up the fund in 1969… hedging risk wasn’t new but we took it to an extreme never before tried.” 

“We managed the fund with mathematical formulas, economic models, and computers. This nearly total reliance on quantitative methods was unique, making us the earliest of a new breed…” -A Man For All Markets, pg 166 

50 years later, that risk management #process is not unique, but it’s certainly still working if you have a fundamental Global Macro overlay. Instead of complaining about The Machine, you should be using it to your advantage. 

Back to the Global Macro Grind… 

While hedge fund returns aren’t what they used to be (between 1969 and 1979, Thorp was up +409%, annualizing at +17.7% before fees), that doesn’t mean you can’t apply a rules-based and data driven hedge fund #process to beat your Long/Short and/or Long Only competition. 

BREAKING: Global Bond Markets Go Mad As Everything Rallies At Once 

Bond King, don’t be mad bro. But that’s the #1 market headline on Bloomberg this morning. That comes only 6 months after every CNBC Macro Tourist headline was suggesting “rates are heading higher” and the US 10yr is “going to 4%.” 

The Machine, Long Housing, etc. - 03.26.2019 yield cartoon

Why is it that the Old Wall and its media is constantly being surprised by both the direction and pace of macro moves? Whether it was the Russell 2000 crashing -27.2% from its cycle-peak on AUG 30 of 2018 to its DEC 24, 2018 low… 

Or the recent collapse in not only US Treasury Yields, but Global Sovereign bond yields… why is this happening? 

Whether your competition realizes this yet or not (hopefully not), these moves have all happened as a direct result of the 2 MOST CAUSAL FACTORS in all of macro (Growth & Inflation) #slowing, at the same time. 

The Machine sees the ROC (rate of change data) just like you can. It’s not acting randomly or unfairly. It’s just unwinding portfolios who aren’t positioned properly, quickly! 

“So, is it all priced in?” 

I don’t know the answer to that question, but I get asked that question all of the time. I think a lot of people want to (or need to) believe that the answer starts with some kind of “valuation” reasoning.

My reasoning never starts with that. It always starts with the rate of change. Are the causal (fundamental) factors that perpetuated the TRENDING declines or ascents #accelerating, #decelerating, or changing direction? 

God willing, that’s what I wake up measuring and mapping at the top of every risk management morning. 

Enough about that. How about Housing, bro? Alongside our Quad 4 in Q4 call on SEP 27, 2018 to buy Treasuries (across the curve), Utilities (all-time highs again yesterday), and REITS (VNQ), we said buy Housing (ITB) and: 

  1. Lots of people disagreed with that view because …
  2. Pre the OCT-DEC crash in US Equities, Housing was the WORST Sector Style to be long for JAN-SEP 2018 

And now, lots of people agree with that view because: 

  1. Rates have collapsed
  2. Housing (ITB) is up +17.5% from where you could have bought it in OCT 

Housing was also up over +2% yesterday in a down tape (SPY down -0.5% on the day and down for the 14th day in the last 21 US trading days). Unlike the Financials (XLF) or the Russell (IWM), Housing also closed at a new YTD high. 

While our Long Housing call was effectively a 1-factor model back in OCT (Rates Down from #PeakCycle), the fundamental supply and demand story has been ROC (rate of change) solid for the last few months: 

A) MBA Purchase Applications have #accelerated to 246 vs. 241 prior
B) Pending Home Sales have #accelerated to 103.2 vs. 98.7 prior
C) Existing Home Sales have #accelerated to 5.51 vs. 4.93 prior 

Cool. But what do we do from here? 

A) Housing (ITB) signaled immediate-term TRADE overbought yesterday
B) Housing does less good in Quad 3 than it does in Quad 4 

So my A/B test on that says sell-some (book some gains) and be less aggressive buying the damn dips than you should have been going back to OCT-DEC or 2018. 

Getting asset allocations, sector styles, and factor exposures right is a lot easier than beating the house in Blackjack. 

In markets, the time to go big is when A) your #process suggests you have an advantage and B) all of Wall Street is betting against you. After markets move in your favor, book gains and bet smaller when everyone agrees to agree. 

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

UST 10yr Yield 2.34-2.58% (bearish)
UST 2yr Yield 2.17-2.41% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 57.00-59.38 (bullish)
REITS (VNQ) 84.12-87.08 (bullish)
Housing (ITB) 33.50-36.06 (bullish)
Financials (XLF) 24.58-25.99 (bearish)
Nikkei 204 (bearish)
VIX 13.01-16.99 (neutral)
USD 95.25-96.70 (neutral) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

The Machine, Long Housing, etc. - Chart of the Day