“We got in just under the wire.”
-Steve Schwarzman

Did they ever! Even the longest of long-term investors know that timing matters. As Schwarzman went on to explain in King of Capital: “I was exceptionally nervous and putting pressure on everyone to close…”

“He worked the phones, and on Thursday, October 15, 1987, Blackstone wrapped up the fund at around $635 million, with some mop up legal work on Friday.” -King of Capital, pg 55

Everyone who knows market history knows what happened on Monday, October 19, 1987. The Dow crashed -22.6%, in a day. Super #LateCycle it was for the US economy come 1988, indeed.

Time To Get In? - 01.10.2019 mad dog cycle cartoon

Back to the Global Macro Grind…

I personally shorted some Private Equity via PSP yesterday. That’s nothing against all of my friends who have crushed it in Private Equity. Getting long of both my own company and Private Equity is one of the best #EarlyCycle investments I’ve ever made (2009).

Schwarzman, Pete Petersen, and their new Blackstone partners didn’t just get in “under the wire” in 1987, they were perfectly positioned (with fresh capital) to capitalize on unbelievably cheap assets in 1.

Timing matters.

And it especially matters on the short side. It’s one thing to not get levered long pro-cyclically. It requires an entirely different risk management #process to start making asymmetric bets on the short side of cyclical asset classes and sector exposures.

Alongside shorting Private Equity (PSP) here (and being long it from The Cycle low of 2016 to the peak of the US Profit Cycle in Q3 of 2018), we recently added Short Consumer Staples (XLP) to our Best Ideas list for Global Macro investors who can be long and short.

On the other side of that, we added Long Energy (XLE). Both cyclical bets are based on #InflationAccelerating.

Also known to power-users of the Hedgeye Risk Management #process as #Quad3, most Macro Aware people would recognize this economic quadrant as stagflation. That’s when:

A) Inflation accelerates … and
B) Real growth #slows

Combine that A/B Test with bad executive behavior and you’ll have yourself a tasty #1 Big Mac Short Combo at McDonald’s (MCD) yesterday. For those of you who want more details on that Best Idea Short @Hedgeye, ping my Partner, Howard Penney.

Since these were the only 2 new US Equity Sector Style pivots we made in our Q4 Macro Themes deck, at the all-time SPY highs yesterday, I didn’t have to have the US stock market FOMO to have a great day in the p.a.:

  1. Consumer Staples (XLP) were down -1.0% to -1.4% for Q4 to-date
  2. Energy Stocks (XLE) were up +3.3% to +3.4% for Q4 to-date

Pivoting from Short Energy (XLE) to Long and from Long Consumer Staples (XLP) to Short is what our multi-factor and multi-duration risk management model is built to do when the ROC (rate of change) changes its second derivative direction.

Our Independent Research team also applies this ROC process to “stocks.” That’s how we find pro-cyclical shorts like Insperity (NSP) which was down -37% at one point yesterday on a not “better than expected” report about where they are in The Cycle.

3 more examples of #LateCycle shorts we have @Hedgeye right now that reported last night are:

  1. Marriott (MAR)
  2. Shake Shack (SHAK)
  3. Uber (UBER)

Not only was Marriott’s (MAR) quarter not “better than expected” (they missed numbers that they already guided down towards), but their guidance was lower, again. The whole “better than expected” gets worse when cash flows go negative year-over-year.

But don’t worry, Marriott’s guidance for 0% to 1% RevPar (revenue growth per available room) is going to get so much better post Trump’s #BeanDeal, eh? On Uber (which we’ve been short since the Old Wall pump and dumped the IPO), good luck with that.

Shake Shack (SHAK) is also a classic growth stock that gets hammered when A) sales #slow into B) rising costs (both labor and food). Where do you think we came up with The Quad thing btw? I was born and raised as a short seller on Wall Street in 2000-2001.

Timing mattered for the short selling successes I was having (in #LateCycle US Consumer stocks) early in my buy-side career. Timing always matters. Trying to “time” what MAR, UBER, and SHAK are worth today?

After closing at $84 yesterday, maybe Private Equity can take SHAK private counter-cyclically at $44/share? Wait on it… you won’t “feel” like it’s time to get in on that story stock today!

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

UST 10yr Yield 1.67-1.87% (bearish)
SPX 3003-3088 (bullish)
NASDAQ 8169-8469 (bullish)
Energy (XLE) 57.40-61.97 (bullish)
Shanghai Comp 2 (bearish)
DAX 120 (bullish)
VIX 12.02-15.74 (bearish)
USD 96.95-97.75 (neutral)
Oil (WTI) 54.12-57.37 (bullish)
Nat Gas 2.29-2.93 (bullish)
Gold 1 (bullish)
Copper 2.61-2.71 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Time To Get In? - Chart of the Day