“I will bring them back from captivity and restore them to the land I gave their ancestors to possess.”
- Jeremiah 30: 2-3
No worries, while I am a good Irish Catholic boy, I am not going all religious on you this morning. That’s actually the quote that prefaces a new risk management book I started reading last night: Tap Code – The Epic Survival Tale of a Vietnam POW That Changed Everything.
“On April 4th, 1965, Smitty was the 6th American POW captured in the air war over North Vietnam. Smitty learned a communication technique that we later called the Tap Code… a tool we all desperately needed in the days ahead.” (pg 7)
Now that we’re in this epic cross-asset-volatility war zone, what risk management and market tools are you going to use going forward? For many, lives are at stake. For many more, hard earned retirement accounts are. Observe, Orient, Decide, Act. #OODA
Back to the Global Macro Grind…
The best thing about bear markets is that they give perma-bulls multiple opportunities to get out. For short sellers, the bigger the bounce to lower-highs, the better the short selling opportunity for the next leg down.
So why is it that people chase? At the end of every economic cycle, the cast of Old Wall characters clinging to their 50 & 200-day Moving Monkeys is the same. Storytellers about “stahks” are in bountiful supply. Some are unreformed brokers - others just chart chasers.
In real life, losing 30-50% of your retirement nest egg doesn’t just come back on a bear market bounce.
If you’re my age (45) or older, you’ve seen both your friends and/or their parents lose 50-100% of their money in “stocks”, twice. Who is going to lose what the 3rd time? What have they already lost? And, most importantly, how do they get it back?
I know, I know. “Futures are up +4% this morning – and the bottom is in, Booyah baby!”…
But what if it isn’t? Notwithstanding the simple math that if you chased the all-time SPY high on February 19th, 2020 (no one was “fully invested” or levered long up there, were they?), you need to be up +41% today to get back to breakeven.
If and when you lose 50% of your money, you need to be up +100% to get back to break-even.
This is serious. What you don’t need this morning are a bunch of the same circus clowns talking up their favorite “stocks.” Yes, the last 2 times people lost 50-100% of their retirement money, some of the CNBC clowns were different. But it’s always the same clown show.
What you need are serious, data-driven, and apolitical risk management tools like:
A) Economic Quad Maps
B) TRADE, TREND, TAIL Signals
C) @Hedgeye Risk Ranges
Starting with the Quad Map, we’re about to enter (within a week) the deepest of ROC (rate of change) #Quad4 Phase Transitions we’ve seen in the US Labor Cycle probably ever.
Yep, ever is a very long time, so instead of “nibbling” on the next narrative about the “lows being in” because people who blew up their hedge fund with leverage sold a short-term low, I humbly submit that you pay attention to today’s Chart of The Day: US Jobless Claims.
At this stage of the US economic cycle, when jobless claims bottom and hook higher, they go way higher, faster, than any perma bull of the early, mid, and late cycle can believe. Most of the new cattle class of bulls have never seen this part of The Cycle before.
This is the eye of the storm and yesterday was the 1st shot across the labor market bow:
A) Initial Jobless Claims: +70k to a 4yr high of 281k in the week-ended 3/14
B) Monthly Average Initial Claims: +1,806bps to +12.95% YoY in MAR – the fastest ROC since SEP ‘09
Don’t confuse SEP 2009’s pace with the MAR 2008, then JUL 2008 pace. It’s where you #accelerate from the cycle low (in 2000 and 2007) in that chart that matters. Even the Moving Monkeys will be scared of these “technical” breakouts.
What could possibly go wrong? Well, notwithstanding the fact that Distressed Debt (trading 10 points over Treasuries or at less than 80 cents on the US Dollar) just doubled in 2 weeks and the most Levered HIGH BETA “stocks” dropped 40-60% in a month…
No one actually knows how bad the underlying cash flows to these “it’s different this time” Equities and Credits are going to get. And, to be clear, I don’t mean “no one” on the Old Wall who hasn’t cut their “forecasts” yet. I mean the people running the companies.
What happens when a company’s cash flow is already (pre-virus) negative and goes more negative? They cut spending and fire people.
The Fed can cut rates again, and again, and again. In fact, this morning the Fed’s Balance Sheet has mushroom-clouded to a record high $4.7 TRILLION Dollars. And they’re just getting started!
Will The Mon-ooch writing us $1,000 “checks” change that?
Of course not. When a Millennial generation loses their job for the first time, are they getting re-hired at month-end when someone needs their “stocks” to go up, so it doesn’t “look that bad” with “everyone bearish” either?
I’m not trying to scare anyone or be a pessimist. I’m being a rate of change realist.
And, like I was in April of 2009, or in the summer of 2002 for that matter, I expect to be more optimistic about “stocks” than anyone you’ll read… without having to be up 100% from there for the next 2-3 years just to get my family’s nest egg back to break-even.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.50-1.28% (bearish)
SPX 2 (bearish)
RUT (bearish)
NASDAQ 6 (bearish)
Tech (XLK) 68.87-81.15 (bearish)
DAX 7 (bearish)
VIX 45.14-91.33 (bullish)
USD 97.01-103.95 (bullish)
Oil (WTI) 21.29-30.34 (bearish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
