Staring at The Sun

This note was originally published at 8am on January 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“It's best not to stare at the sun during an eclipse.” 

-Jeff Goldblum

As a younger man who came to America in the mid 1990’s wearing Canadian cutoff jean shorts, I enjoyed sunning myself. As I age, I try not to do that as much; especially during an eclipse.

Today the world will see the first partial eclipse of 2011. Africans and Europeans will witness it at sunrise. Russians and Chinese will get their eclipse at sunset.

No matter where you are in this world this morning, there it is – a new year, new investment opportunities, and new risks. If you are staring at a market price that’s already gone straight up in 2011, our best recommendation is to heed Jurrasic Park’s Jeff Goldblum’s risk management advice – don’t stare at it – it’s going to be a long race.

As market prices around the world race higher this morning, the sun is shining on the bulls. While I’m certainly not basking like Countrywide CEO Tan-gelo Mozilo did back in the day (my SPY short position is currently -3.80% against me), I’m as happy as the next clam who is long anything. Market prices that go lunar ahead of an eclipse are cool that way. Everybody gets paid.

In yesterday’s Early Look, I walked through our Hedgeye Asset Allocation Model. This morning I’ll focus on the Hedgeye Virtual Portfolio. They are 2 separate risk management products and I call them “virtual” because instead of running money, I run my mouth.

Currently the Hedgeye Portfolio is in what I consider a neutral position. We have 12 LONGS and 12 SHORTS.

As of last night’s close, our biggest un-realized winners and losers are:

  1. Top Winner: LONG Starbucks (SBUX) = +188.63%
  2. Top Loser: SHORT American Express (AXP) = -4.81%

Not unlike anyone who runs real money in this business, all of the positions I take in the Hedgeye Portfolio are marked-to-market every second of every day. Unlike most of the conflicted and compromised broker ratings and market pundits out there, we are accountable to every position we take.

Yesterday, I made the following risk management moves in the Hedgeye Portfolio:

  1. Shorted Tech (XLK) on the Facebook “news” as it was immediate-term TRADE overbought
  2. Shorted Industrials (XLI) after the sector closed up +25.5% in 2010 and was also immediate-term TRADE overbought
  3. Bought US Treasury Curve Flattener (FLAT) as the yield spread continues to make what we call lower-highs at 274bps wide
  4. Sold Suncor (SU) as the stock and commodity prices were hitting new highs (it too was immediate-term TRADE overbought)
  5. Shorted Bank of America (BAC) on the “settlement news” after our Financials Sector Head, Josh Steiner, made a call on it

Booking gains and/or searching for new absolute return ideas on the long and short side is what risk managers do. Some people buy-and-hold. Some people day-trade. The market doesn’t really care what your style is – like an eclipse, it’s going to do what it is going to do.

While you may need to be staring directly into the sun right now to be willfully blind to Global Inflation Accelerating, you don’t need an eclipse to generate inflation when market prices are inflating. Post daisy dukes ditching at Yale, I paid my own room and board to learn that’s what happens when prices go up.

On the topic of inflation, while it will be interesting to read the Fed’s Minutes later on this afternoon, the rest of the world has already agreed with us that a +10% monthly spike in the 19 component CRB Commodities Index since the beginning of December to new highs of 333 yesterday is indeed inflationary.

In fact, in the last 24 hours these are the 2 words that the Brazilians and South Koreans used to describe inflations:

  1. Brazil = “plague”
  2. South Korea = “war”

We think they are serious. So is staring at the sun.

In addition to being long German Equities (EWG), US Healthcare(XLV), Oil (OIL), Sugar (SGG), and Treasury Inflation Protection (TIP), I remain bullish on American and Chinese Cash (UUP and CYB). I’m bearish on US Treasury bonds (SHY) and bearish on Gold (GLD) – those are 2 of the 12 positions in the Hedgeye Portfolio that were working for us yesterday. There’s always risk to be managed somewhere.

My immediate term support and resistance levels for the SP500 are now 1259 and 1273, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Staring at The Sun - sun