This note was originally published at 8am on December 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The point is, in investing, price has to matter.”
That’s what Oaktree’s investment chief, Howard Marks, wrote in a recent memo to his clients where he was talking down the perception of value embedded in the price of gold. It’s a very simple market practitioner’s point, but it’s worth highlighting; especially as we traverse year-end storytelling as to why everything that’s going up in price is still “cheap.”
The price of the US stock market was cheaper 4 trading days ago than it was at last night’s closing price of 1254. That’s because the SP500 has been up for 4 consecutive days, taking it to a new YTD high. But does that make the price of the US stock market cheap?
Well, it’s definitely not cheaper than the SP500’s March 2009 closing low of 676. An arithmetically proficient 8th grader could tell you that 1254 is +85.5% more expensive. In fact, if I give him the right button to press while he is sitting on my lap at my desk, my 3-year-old son could get you a PE ratio and 200-day Moving Monkey average on that too.
Wall Street’s favorite way to justify higher-prices is to talk about “valuation.” Again, the opacity of the lingo is what it is, but it’s less convincing to hear a fast monkey talk about valuation today than it was, say, before the internet. Calculating “valuation” on the sell side’s consensus estimates is a trivial exercise that requires a connection, not an education.
Storytelling about “valuation”, however, requires academic degrees spanning law and social science. At the end of the day, the stories don’t change the historical reality that stocks, bonds, and commodities trade all over the place on “valuation” but, most importantly, on last price.
In the last 6 months, let’s look at what some prices have done at the same time as the storytellers talk about “the deflation”:
- SP500 = +23%
- CRB Commodities Index = +28%
- Copper = +47%
Now before I accuse myself of cherry-picking that all-time high price of copper of $4.27/lb this morning and what it may mean to people who make and/or sell things that include the price of copper, let me tone down my argument and look at the price of oil. Its price is up less.
The price of gasoline is hitting higher-highs this morning after a +25% move in the price of WTI crude oil since July, and the Chinese are being forced to raise consumer gas prices this morning for the 3rd time in 2010. Price fixing aside, I suppose this is Ben Bernanke’s Merry Christmas card to the world’s lower and middle class.
Inflation is a policy and Price Matters.
Ask the Bank of England. Finally it reflected some form of reality in their policy statement this morning as they opined on inflation. The minutes in the BOE’s statement read that “most of those members considered that the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards.”
Now, to be clear, don’t expect Bernanke to do what the BOE just did. If Ben Bernanke didn’t see inflation hammering America’s middle class with $150/oil in 2008, don’t expect him to see it (or Chinese or Brazilian inflation) ramping to the upside like the prices on your screen are this morning. The Heli-Ben doesn’t do global macro.
The Ber-nank’s storytelling and views about last price don’t trump what’s happening to market prices. Inflation has been hurting emerging market prices (stocks, bonds, and currencies) since November, and we don’t see what will change that direction of market prices in the new year. Inflation is a matter of prices. It’s the one thing that’s killed modern societies (and their markets) for hundreds of years.
As always, Price Matters to every long and short position we hold in the Hedgeye Portfolio. Being short the SP500 (SPY) for the last 3 weeks has been as wrong (-3.84% against me) as being long Corn (CORN), Germany (EWG), and China National Offshore (CEO) has been right.
In terms of Asset Allocation, my best “idea” going into 2011 is being long of Cash. The price of American cash (US Dollar Index) is one of the few price charts in global macro that isn’t trading at its cycle highs yet. Heck, maybe someone can tell me a story that it’s “cheap.” US Congress’ credibility on fiscal responsibility definitely trades at a discount!
And, yes, I get that in a world where you can’t buy bonds (because they are going straight down in the face of Global Inflation Accelerating) that Bernanke is daring me to chase the “yield” of the US stock market’s last price. But I also get that investing in a globally interconnected marketplace has less and less to do with the US stock market’s price than it did before 2008.
My immediate term TRADE lines of support and resistance for the SP500 are now 1242 and 1256, respectively. We’re still long the US Dollar (UUP) and short the Euro (FXE) in the Hedgeye Portfolio and the Cash position in the Hedgeye Asset Allocation Model is currently 67%.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer