“Negotiation is the heart of collaboration.”
- Chris Voss
One of our most Macro Aware Institutional clients encouraged me to read Chris Voss’ #behavioral book, Never Split The Difference. Voss is a former FBI hostage negotiator and founder of a company he called The Black Swan Group.
Negotiating with your analysts and/or self on what portfolio moves to make next? Voss says negotiation “is what makes conflict potentially meaningful and productive for all parties. It can change your life, as it has changed mine.” (pg 21)
Since I’m negotiating with myself on what business (and portfolio) decisions to make next every day, Voss certainly made me think about my own biases and opportunities to improve my decision making #process. I think he’ll do the same for you.
Back to the Global Macro Grind…
Having had countless conversations and debates with Portfolio Managers, Analysts, Traders, etc. on Wall Street over the course of the last 20 years, I’ve come to realize what I know about myself – we all have biases.
My bias is my Signal & Quad & Pod #process. For others, it’s whatever they have at the heart of their decision making process. Lots of people anchor on Valuation. Many use some sort of Technical Analysis. Lots of narratives out there too.
Breaking what I do down to the studs:
- SIGNAL – I built a multi-factor (price, volume, volatility) and multi-duration (TRADEs, TRENDs, and TAILs) process
- QUADS – the ROC (rate of change) of incoming data vs. the prior (base effects) of GROWTH and INFLATION
- PODS – the ROC of incoming REVENUE (Pod 1) and PROFIT (Pod 2) data and analysis vs. the base effects
At least in my own head, what I do and why is crystal clear. My challenge is to communicate it to all of you.
That’s not easy. And it’s a lot harder to do when I’m speaking with someone who hasn’t communicated their process. Once they do, I can start to empathize with their talking points. It’s much easier if they talk in numbers instead of narratives.
But you see how there’s a lot of me in all of that? My communication problem starts with an interpretation problem. How do I negotiate my position (which is based on the aforementioned 1-2-3 process, in that order) vs. talking points?
Moreover, since I am often in my own fishbowl, communicating from a one-to-many perspective (Early Look, Macro Show, Tweets, etc.), I seemingly swim in circles, saying the same thing over and over again, to myself!
Enough about me this morning, what about you? What’s your process?
- Have you built a back-tested signaling process that LEADS your fundamental research process?
- Fundamentally, do you believe building your portfolios starts with macro (Quads) or micro (stock picks)?
- Fundamentally, do your single stock and credit selections get sized according to points 1 and 2?
While many people don’t think of portfolio construction, timing, and sizing the way I do (that’s a very good thing), I meet with and speak with more and more people that do every day. I can’t explain in words how exciting that is!
In terms of market-timing (very dirty words to Captain Stock Picker who starts with company PODS and doesn’t do either “Macro” or allow a series of interconnected market signals trump his or her stock picks), today is a good negotiation day.
Why? What are my signals prompting me to negotiate with myself? Let’s do the 3 big debates in my notebook:
- USD vs. Commodities – if USD Index signals #oversold at 92.04 will Commodities (CRB) signal #overbought at 154?
- Tech – with both AAPL and MSFT signaling lower-highs within Bullish TRENDS, what does the same for XLK mean?
- Germany – will the DAX fail to make higher-highs for the 3rd time from a particular spot that matters in 3 months?
To me, these 3 negotiations matter more than anything I could chat about with any of my analysts.
Why? Because, in terms of portfolio construction (i.e. sizing), getting any or all of these 3 answers wrong will mean I won’t optimize how much capital I preserve and then have an opportunity to compound upon.
The alternative to negotiating with yourself this way is to have massive single stock or credit bets that trump anything else that could happen in your portfolio today. In case you don’t know who Captain Stock Picker really is – he used to be me.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.77-1.01% (neutral)
SPX 3 (bullish)
RUT 1 (bullish)
Tech (XLK) 117.04-123.73 (bullish)
Energy (XLE) 31.32-37.20 (bullish)
DAX 129 (bearish)
VIX 20.78-29.55 (bearish)
USD 92.04-93.39 (bearish)
EUR/USD 1.171-1.189 (bullish)
Oil (WTI) 37.40-42.97 (bullish)
Gold 1 (neutral)
Copper 3.11-3.25 (bullish)
MSFT 209-225 (bullish)
AAPL 112-123 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
