This is the immediate term "Trade" as I see it right now. Remember, my price models reset every 90 minutes. As the facts change, I will.
(picture courtesy of: http://www.robertcasumbal.com/blog/images/080207_bearish_beat_bullish_450px.jpg)
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
In my perpetual search to find those who “get it” this year, I often find myself looking back to the sage guidance of my old favorites. Yesterday I called out Jack Bogle of Vanguard. Often I look to Warren Buffett, Paul Volcker, and Larry Summers. This morning, I’d like to give some overdue keystroke time to Jeremy Grantham.
In Grantham’s “GMO Quarterly Letter” from July 2008, he highlighted marking assets to market, bailouts and accountability: “Marked to market 6 months ago, Bear Stearns and Lehman were bankrupt as are Fannie and Freddie today. The bailouts are really providing what amounts to capital to insolvent firms… These bailouts permit a shameful lack of accountability for reckless behavior”.
Compare this proactively prepared point of view to Hank Paulson comments yesterday: "We did not sit down and figure this out with a calculator," Paulson told consensus network, CNBC, “This is about our financial markets, confidence in our financial markets." You see, there is a big difference between reactive risk management and proactive prediction of possible risks. I have never met Mr. Paulson, but many of his former teammates tell me he is a good man. I don’t doubt that. That’s not the point. The point is that I don’t think he has a process.
Our investment process here at Research Edge is to combine bottoms up company findings with a global risk management process that perpetually considers tail risks alongside probable outcomes. One of the main risks to the US Financial system remains Asian growth slowing. Now that China has lost 65% of its stock market value since the October highs, people are paying attention. In fact, even Paulson’s ex/current colleagues at Goldman Sachs are starting to see reality on this front. This morning Goldman is downgrading the Chinese bank stocks to “neutral” from “attractive”. China’s banks stocks are down 50% year to date, and I am not sure whose process outlined them as being “attractive” throughout the swan diving competition. I am not sure I care either – I just want to stay as far away from it as humanly possible.
As the S&P Futures were spiking 24 hours ago, a real risk manager should have been looking to sell. That’s what we did all day long in the ‘Hedgeye Portfolio’ yesterday, and we’ll do it again this morning, if given the green lights of opportunity. Most investment students know that there is a proven psychological pressure in investing called the “endowment effect”. This simply reflects the propensity for investors to overvalue what they own. As Richard Peterson points out in ‘Inside The Investor’s Brain’, “one’s emotional state modifies the strength of the endowment effect”… so, provided that you “get” that the US market remains in a negative “Trend” position, you should be able to take advantage of that emotional market signal, and sell strength…
The last people who are going to agree with me on this are those who have a one factor investment process called price. That’s what “momentum investors” do; they chase price – they don’t fade it. Fading the squeeze up in Japanese stocks yesterday was one of the moves I made in the ‘Portfolio’ (shorting EWJ). Another was selling my trading long position in Australia (EWA). This morning, Asian equity markets opened down across the board – Japan closed down -1.8% and Australia down -1.7%. This isn’t magic. This is a proactively managed process.
Across Asia, currencies and stocks got hammered again last night. This is not new. This remains the fundamental “Trend”. This is occurring because Asian cost of capital is increasing in the face of slowing growth. Indonesia led market decliners last night with another -3.9% down move. Remember that they raised rates last week? Taiwan lost another -3.6% overnight – this was one of the consensus plays on “Chinese growth” that even the Harvard Endowment loaded up on, remember? I do…
Remember the geopolitical issues in Pakistan and Thailand? This morning, ex inmate and squirrel hunter extraordinaire, Zardari, is prancing around as Pakistan’s new leader. In Thailand, Prime Minister Samak was forced to step down for receiving benefits for a cooking show! No, you cannot make this stuff up. It’s happening, and if your broker still has you choking on every “its global this time” Asian ETF, remember that these cesspools of risk are what they have always been!
Good luck out there today,
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