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“Learning deeply means learning slowly.”
-David Epstein

That was a great quote from a great book I’ve reviewed in Early Looks this year: Range, by David Epstein. It came from a chapter titled “Learning, Fast and Slow”, which is obviously a riff off one of my favorite risk management books, Thinking, Fast and Slow by Danny Kahneman.

I know you can think as fast as a Trump Tweet, but how good are you at risk managing your portfolio, fast and slow, across durations? Have you studied the secular (long-term) deeply so that you can contextualize The Cycle (intermediate-term) specifically? Or do you “feel” the market?

As Epstein goes on to explain, “teaching you how to read” (transcripts and tweets) isn’t a lasting advantage but “teaching you how to hunt for and connect contextual clues to understand what they really mean can be” (pg 97). That’s what a multi-duration macro #process does for you.

#EarningsSlowing Not Priced In - 04.13.2018 old wall cartoon

Back to the Global Macro Grind…

One of the biggest communication barriers I struggle to overcome is a discussion with someone I’ll call Macro Unaware (on The Cycle, The Quads, etc.) but bottom-up (on a company) as convicted as one can feel.

I get why that’s hard for me. It’s mainly because it’s hard for them. Thinking, Differently and Specifically, is apparently easier to do when analyzing a company than it is when analyzing globally interconnected economic risks.

I’m not criticizing those people. Been there, done that actually. My entire risk management #process was born through the experience of A) a buy-side analyst who B) had to grow into becoming a successful generalist portfolio manager.

Like anyone with experience, I’m just trying my best to help coach and make people better.

Being better at anything in life starts with being aware. Being Macro Aware of the SECULAR and the CYCLICAL is only the beginning of trying to proactively prepare for measurable “risks” that CEOs and CFOs of companies aren’t.

Again, that’s why I built this Macro Overlay into my bottom-up “stock picking” #process 16 years ago. I had to be aware.

One example of my struggle to communicate why #Quad4 matters as much as any stock, bond, currency, or commodity picking prowess you may have is when the analyst I’m speaking with tells me “what’s priced in” at a certain “valuation” and management “guidance.”

Some of the most basic starting questions I have with that premise is:

  1. What assumptions are you making for the rate of change of GROWTH and INFLATION?
  2. What assumptions are you making about The Quads, Sector Styles, and Factor Exposures?
  3. Why do you believe management’s guidance if A and B are variant assumptions?

A good live example of expectations mismatch on this is a relatively large $33B company (that will shrink in cap today) by the name of Autodesk (ADSK) that reported earnings and guided lower last night:

  1. You could have bought the stock at it’s ALL-TIME high in April of 2019 at $178… or
  2. You could have bought more at it’s lower-high in July of 2019 at $174… or
  3. You can buy it in #crash mode (greater than -20% drop from peak) this morning…

I’m not cherry picking here. One of the broadest indexes of US “stocks” (the Russell 2000) made a lower-low vs. its MAY and AUG lows yesterday and is down -16.3% from its cycle peak in AUG of 2018. The ROC connecting #EarningsSlowing to #CapexSlowing is explicit.

Autodesk (ADSK) is an IT Spending stock that ostensibly made all-time highs post US Tax Reform when the US Capex Cycle ramped to ALL-TIME highs in both US Dollars invested and the ROC (rate of change) of year-over-year GROWTH getting to that level of investment.

Now US Capital Spending (CAPEX) just #slowed to NEGATIVE -0.5% year-over-year, and Captain Stock Picker is “surprised” that ADSK “had a great quarter guys” (when CAPEX was still POSITIVE y/y) but guided down for Q3 of 2019 against #PeakCycle compares? Seriously?

Top-down (or Bottom-up), is both CAPEX and EARNINGS #slowing to negative year-over-year GROWTH “priced in”? A: Evidently not.

With 5 of the SP500’s Top 11 Sectors already reporting NEGATIVE year-over-year EARNINGS in Q2, what could possibly go wrong in Q3? With Germany entering a #recession and the Yield Curve as INVERTED as it has been as of this morning, am I still struggling to communicate?

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

UST 10yr Yield 1.45-1.62% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
REITS (VNQ) 89.50-92.37 (bullish)
Financials (XLF) 25.32-26.94 (bearish)
DAX 113 (bearish)
VIX 16.34-23.92 (bullish)
USD 97.42-98.47 (bullish)
GBP/USD 1.20-1.23 (bearish)
Oil (WTI) 53.04-56.77 (bearish)
Gold 1 (bullish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

#EarningsSlowing Not Priced In - Chart of the Day