A Note From Keith McCullough to a Subscriber

Editor's Note: Below is a response written by Hedgeye CEO Keith McCullough recently to one of our subscribers. The subscriber was asking for some additional clarification about our longer-term investing process, as it pertains to the relationship between the Quads and Keith's signaling process.

Hi Bill,

Thanks for your note. Setting aside your comments about my liking to be a short term trader, the points and decisions I’ve made about longer-term Asset Allocation should bridge part of this gap.

While it sounds like you do anchor on the Quads, I’ve never done so myself.

I anchor on my signaling process as THE leading indicator for A) what economic Quad an economy is likely going to be in and B) what those growth and inflation conditions likely mean for company Pods (REVS and EBITDA or EPS).

Therefore there are 3, not 1 major inputs to my longer-term decision making process:

1. Bullish or Bearish TREND signal, across all of Global Macro (not just US stocks)
2. What Quad is the market likely discounting
3. What Pods are companies going to report within the lens of The Profit Cycle 

If you’ve subscribed for 2.5 years and not 13, this is the 1^st time you’ll have heard my emphasis on what a negative year-over-year PROFIT Cycle means for equity and credit exposures. 

It’s the 1^st time you’ve seen both equity vol and credit spreads reflect the same (all part of my signaling process). 

If part of the confusion comes from the basic fact that I didn’t get long Quad 1 or 2 US Equity exposures at the bottom, that’s different. Even if I did that, I would have then have had longer-term Full Cycle investors selling (and shorting) their Gold and Treasuries…

I didn’t do that because, while the DELTA of the Quad was 1 or 2, for a short period of time off the most asymmetric bottom of our lifetime… the year-over-year ROC (rate of change) for both REAL GDP GROWTH and PROFITS is deeply Quad 4 or 3 negative.

Additionally, I wouldn’t have made the Deep Quad 4 call in January (which I have heard no frustrations or complaints about) when the economy wasn’t yet in that reported Quad. My signals can usually front run the Quad we’ll be in by 1-3 months.

That implies that we’ll be in recessionary stagflation (by JUL-SEP).

KM

Keith R. McCullough
Chief Executive Officer
Hedgeye Risk Management