“The average expert was a horrific forecaster.”
-David Epstein
My favorite “experts” on the Old Wall are those who don’t call for any rate of change slow-downs but call for all of the bottoms (after those slow-downs). Rarely right in making timely and accurate risk management calls, but never in doubt!
I guess it takes a few Canadian Yalies to hold these people to account. David Tetlock (author of Superforecasting) took “expert predictions” to task through a survey project that lasted 20 years comprising of “82,361 probability estimates about the future.”
“When the experts declared some future event was impossible, it nonetheless occurred 15% of the time. When they declared it a sure thing, it failed to transpire more than 25% of the time… Many experts never admitted systematic flaws in their judgment, even in the face of their results. When they succeeded, it was completely on their own merits!” (Range, pg 219)
Back to the Global Macro Grind…
To be crystal clear on the difference between what they do and what we do, objectively and apolitically now-casting using real-time economic and market data is entirely different than linear “forecasting” with a permanently bullish bias about the future.
AFTER something #slows, obviously expectations start to change. That’s when you’ll hear about what’s “better than expected” (i.e. after something goes down). What’s “better than expected” is subject to much more opinion that the ROC (rate of change) is.
A recent example of this was one of our Best Idea Shorts (Netflix, NFLX) reporting quarterly results:
A) If you loved the stock in July at $381, you came into the report having seen $254/share in September
B) What’s a -33% crash in a widely owned “secular grower” amongst friends?
C) Then the stock trades “up” towards $280 ahead of the EPS print…
D) And rips on “boom!” and “better than expected” comments from the Old Wall on earnings day
You could have sold all you wanted at $312/share that day… sold more at $290-300/share the following day… and now sell more of the damn thing at $266/share this morning. Yes, that’s still down -30% from where we told you to short the stock.
What was better than expected? Our returns on the short side were.
Instead of doing this with a “stock”, let’s use another example of expectations by US Equity Sector Style:
A) Housing Stocks (ITB) vs.
B) Software Stocks (IGV)
Unlike Software Stocks (IGV) which were down another -0.7% yesterday ahead of another $43B “cloud” stock (ServiceNow, NOW) imploding last night:
A) Housing Stocks (ITB) were up another +0.6% on the day on new “news” that …
B) Existing Home Sales #accelerated to a fresh 30-month ROC high growth rate of +3.9% year-over-year
Since both Netflix (NFLX) and Software Bubbles (IGV) peaked in July of 2019:
A) Housing Stocks (ITB) are up +16.5% vs.
B) Software Stocks (IGV) down -10.9%
For the intermediate-term long-term #FullCycleInvestor, what was ultimately better than expected? I guess if you expected NFLX to underperform “the cloud” since July, you could say you nailed those expectations too!
Don’t worry, I’m not using cherry-picked total return dates for these examples. I’m using what our now-casting risk management #process chose as timely (yes, market timing matters) long vs. short ideas. We went bullish on US Housing on SEP 27, 2018.
And how about the now-cast of what’s been widely proclaimed to be a “better than expected” Earnings Season (pre McDonalds, MCD, and Texas Instruments, TXN, getting tagged in the last 48 hours?)?
So far 8 of 68 Technology companies have reported an aggregate year-over-year earnings slow-down of -30.9% year-over-year. That’s not a typo. But in the most widely owned Sector in the SP500, is that better than expected?
I sincerely hope that your in-house experts aren’t horrific forecasters this earnings season. After “better than expected” progress on a #BeanDeal and Brexit (or not?), the rest of your stock and sector picking #EarningsSlowing season is going to depend on it.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.56-1.82% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
REITS (VNQ) 92.12-95.98 (bullish)
Shanghai Comp 2 (bearish)
VIX 12.22-18.50 (neutral)
USD 96.68-98.53 (bullish)
GBP/USD 1.24-1.31 (bullish)
Oil (WTI) 52.17-54.94 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
