Stubborn Believers

This note was originally published at 8am on December 29, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“This stubbornness in the face of clear data is right up there with the efficient market believers.”

-Jeremy Grantham (Quarterly Letter, October 2010)

 

Quite often I get asked whose research thoughts I try to incorporate into my global macro risk management process. In terms of risk managers who are still alive, I have a relatively short list. Jeremy Grantham, Jim Grant, and John Hussman are at the top of it. All three of these gentleman write consistently, quantitatively, and accountably.

 

This isn’t to say that there aren’t plenty of thoughtful people out there who are worth reading. This is to say, however, that there are plenty more opinions in the market place than there is time. Taking the time to focus on doing your own work is critical.

 

I’m fairly maniacal about writing down my investment thoughts. I use the same amount of space, on the same number of pages, in the same notebooks, every day. When my own work isn’t working, I shut down the noise, review my notes, and rethink my theses.  Then, if I have time, I re-read some of the more pertinent intermediate-term TREND thoughts of some of the aforementioned thinkers to keep myself in check.

 

Yesterday, I was re-reading Jeremy Grantham’s Quarterly Letter for October titled “Night of the Living Fed” and that helped me re-think my global macro positioning heading into 2011.

 

Before you scroll down, don’t worry – I’m not covering my short position in the SP500 (it’s -2.81% against me). I currently hold 11 SHORT positions in the Hedgeye Portfolio (versus 10 LONGS) and my biggest loser on the short side is an unrealized loss of -4.8% in Hudson City Bancorp (HCBK). I’ve been bearish plenty enough times on US stocks in my career with performance that’s worse than that.

 

Being bearish on US stocks here doesn’t mean you have to be bearish on everything – that’s a US-centric stock market investor’s risk management problem, not yours. You can also be bearish on the Fed and make money being long the US Dollar (or short US Treasury bonds). Both are bets that Bernanke fails to debauch America’s currency and hold rates of return on American savings accounts unsustainably low.

 

Grantham, Grant, and Hussman aren’t fans of The Ber-nank either. So, while hope is not an investment process, I’m really hoping we can start a little Groupthink Club of our own ahead of Bernanke having to face both Ron Paul and more dissenting Fed Voting Members in 2011.

 

On the politicized US central bank, here are some valuable excerpts from Grantham in the “Night of the Living Fed”: 

  1. On Evolution: “… displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.”
  2. On Quantitative Guessing (QG): “Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy.”
  3. On US Economic Growth: “… on the positive side, all it can do is move demand forward by a few weeks and then give it back later. This is the paper world. It is, in an important sense, not the real world.” 

The “real world” is, of course, real-time… and… as Ludwig von Mises said, “For many people, the “long run” quickly becomes the short run.” There’s no better evidence of that than daily, weekly, and monthly price, sentiment, and expectations data.

 

On the inflation side, with the 19 component CRB Commodities Index hitting another fresh YTD high yesterday up at 331, here’s what the expectations of higher prices (inflation) have done: 

  1. Week-to-date = +0.61%
  2. Month-to-date = +9.6%!
  3. Quarter-to-date = +16.1% 

For a man who preaches “price stability”, that’s nice Heli-Ben… really nice. The 45 MILLION Americans on food stamps salute you.

 

On the sentiment side, not surprisingly now that holiday cheer is becoming a rear-view event, this morning’s ABC Consumer Confidence reading dropped to minus -44 versus minus -41 last week. Jobless Stagflation in America perpetuated by a Fed policy to inflate isn’t cool for the 90% of Americans who aren’t levered-long the SPY.

 

Meanwhile, US-centric stock market bulls continue to be Stubborn Believers (like they were in late 07’ and early 08’) that stocks are “cheap” even though corporate earnings are being fueled by record low costs of capital (interest rates) and peak operating margins.

 

Managing risk using record low interest rates and peak margins as perpetual plugs in an earnings model is something that only a historian who has never run a business or a global macro P&L would do. Or should I say, dare you to do. Ben Bernanke, good luck with that in 2011.

 

My immediate term support and resistance levels for the SP500 are now 1250 and 1266, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

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