“He was yet unknown to those with whom he would be dealing.”
-David McCullough on Manasseh Cutler 

I spent all of yesterday meeting with Institutional Investors in NYC. It was hot in a suit, and I liked it. There’s nothing like engaging in debate. The #1 question was “is it all priced in?” By “it”, people meant the US economy re-entering Quad 4 in Q3.

While that’s a humbling compliment to consider, the Hedgeye “call” is not the “it” that buy-siders should be worrying about as THE consensus. If you poll 5,000 Institutional Investors, I’d bet less than 10% of them know what The Quads actually are. 

The aforementioned quote comes from David McCullough’s recent US #history book, The Pioneers. While our risk management #process is still unknown to many, I deal with plenty of clients who get it. Sometimes they over-think it too.

Back to the Global Macro Grind… 

Is It All Priced In? - z hedgeye 12

What if consensus being concerned that “it’s all priced in” is all priced in? Oh boy, from Friday’s all-time SPY high wouldn’t that be a shocker. It certainly was for those who didn’t understand the risks associated with Quad 4 in Q4 of 2018

I get it. The performance pressure out there is surreal. Back when I started as an analyst at a hedge fund in 2000, we used to have a marketing slide showing our performance’s correlation to US Equity Beta (i.e. to what the market is doing) at 0.3. 

Today, depending on what swath of the over-supplied mutual and hedge fund universe you’re looking at, that correlation is closer to 0.8-0.9. Reality is that consensus PMs chase high and freak-out (sell) lower. They don’t do The Quads.

Yesterday was an interesting day to be in full throttle debate: 

A) US Dollar was up again and that only really happens with both the Global and US economies in Quad 4
B) Commodities, as an asset class, had no bid and remained Bearish @Hedgeye TREND
C) Asian Equities got hammered with the Hang Seng and KOSPI still signaling Bearish @Hedgeye TREND
D) In US “stocks” space, High Beta Energy Stocks (XOP) led losers at -1.9% on the day
E) REITS (VNQ) +0.3% and Utilities (XLU) +0.5% on the day led gainers, as they should on a Quad 4 day 

So, if “it” is getting priced in, I’d say Bond Proxies (which have been pounding the returns of anything Global or US Equity since we started making this call over 10 months ago) are, to a degree, as Treasury Bond Yields price in the 1st Fed rate cut.

That’s why I think my answer to what’s “priced in” surprised some people (READ: in my p.a., I’m selling some of my gross exposure to my core LONG positions into tomorrow’s Fed cut)… 

I think what some wanted me to say was that “all the bad news is priced into” my best SHORT ideas! 

No, no, no. Especially on the SHORTS that haven’t worked since the last time Quad 4 was “priced in” (i.e. during the worst December in the history of US stock market Decembers), I’m licking my chops on those. 

Moves I #timestamped yesterday in Real-Time Alerts were: 

  1. Sell-some gross exposure to REITS (XLU) and Utes (XLU)
  2. After covering lower, I re-shorted High Yield (HYG) and added to Junk (JNK) shorts
  3. I booked a big win on the short side of NSP and re-shorted NFLX 

“But stocks aren’t going down on bad news…” 

Huh? NSP (Insperity) is a Best SHORT Idea @Hedgeye and it was down -25% on the day yesterday. Netflix (NFLX) obviously got crushed on missing for the 1st time in a long time, so shorting more on the bounce was the opportunity there. 

Then there’s a broad basket of things from cyclicals (that had already been guiding down for, in some cases, almost a year now) to growth stocks that are getting hammered this morning: 

  1. McDermott (MDR) crashing -32% after bouncing off the May lows
  2. Mohawk (MHK) -18% crashing (again) after bouncing off its December lows
  3. Beyond Meat (BYND) -14% this morning from its bubbled up highs
  4. SS&C Technology (SSNC) -22% this morning after being up a ton “year-to-date”
  5. Rambus (RMBS) -10% this am post the v-bottom in Semis from their December lows 

I know, I know. I admit cherry picking on Rambus. It’s an oldie from what was “priced in” as The Cycle was peaking in the year 2000 and plenty were forced to chase, cover, and capitulate on Semis… 

Almost every Tech analyst at the hedge fund I was at was fired by 2001. 

“So”… what’s really priced in? I didn’t mention classic cyclicals like Terex (TEX) indicated down -15% this morning or something boring like Cooper Tire (CTB) down -10% on earnings yesterday… because… evidently the bad news wasn’t priced in. 

Bottom line: get The Cycle, The Quads, and your Single Stock Picks right… and you’ll beat a lot of people making sweeping “feel” based assumptions on what’s “priced into” a cycle that most people they read didn’t call at the turn to begin with. 

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

UST 10yr Yield 2.00-2.11% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 59.06-61.16 (bullish)
REITS (VNQ) 86.98-89.30 (bullish)
VIX 12.01-15.76 (neutral)
USD 96.30-98.22 (bullish)
GBP/USD 1.21-1.24 (bearish)
Oil (WTI) 54.26-57.82 (bearish) 

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Is It All Priced In? - Chart of the Day