How Bearish Are The Bulls?

How Bearish Are The Bulls? - asset allocation010209

“The illiterate of the 21st century will not be those who cannot read or write… but those who cannot learn, unlearn, and relearn.”
-Alvin Toffler

On New Year’s Day, one of our team’s most valuable players, Tanya Clark, sent our firm that Toffler quote as a reminder to continue to keep doing more of what we have been doing here since we started the firm in 2008. Demand from yourself to evolve. It remains the most critical aspect to a proactive risk management process. What worked yesterday does not have a birth right to work tomorrow. Be objective. Be the change you want to see every day.

Alvin Toffler is what the mass media refers to as a “futurist.” He and Ray Kurzweil are two of my favorite thought leaders in this category of my Amazon directory. While their thought process wouldn’t work if carbon copied into our daily objective (being right on markets), there are certainly components of their conclusions that are additive to how we ask THE questions here at Research Edge.

One of THE questions I have for 2009 is how bearish are the bulls? Since we have been bullish for the last month, and are now upping the ante for an “Obamerica” January squeeze, a discerning investor asked me on Wednesday who I thought the incremental “buyer” of stocks would be? Good question. If it’s not your local hedge fund mafia member who was fired and/or sent on a mission to “Chindia” for Q1, who could actually buy stocks?

The answer of course is a whole lot of people that didn’t lever themselves up to the gills with stocks at this time last year. There were plenty of winners in the 2008 game and this morning, these capitalists are fired up to get that 930AM bell rung and get this 2009 game started. We have been admiring John Paulson’s $36B hedge fund as of late – and he may be the only person I can find that was more openly bullish in December I was. The only person who was bearish at this time last year at least. Why is that? Maybe it’s because he is ALLOWED to be bullish…

After seeing the worst US stock market decline in 77 years, are the bulls allowed to be less bearish? This was the 2nd worse stock market season since 1871, and according to my old Yale economics professor’s math (Robert Shiller, who gave me a B+ by the way, and I am still bitter about that), the SP500, with dividends, recorded an annual decline of -40.3% in 1931. That was much worse than the prior 2nd place holder, 1937, which lost -30.7%. At -38.5%, the revisionist historians now get to put 2008 as the silver medalist in futility.

As interestingly, if you look under the hood of the US market in December, the returns across the major market indices were bullish! The SP500 closed the month UP +0.80% at 903; the Nasdaq was UP +2.7%; and there was a bull market in the Russell 2000, locking in a HUGE +5.6% December 2008 gain!

I know, I know… this wasn’t supposed to happen. Neither was Wednesday’s +14% intraday squeeze move in crude oil (which we sold into). But they happened… and once again, I must ask myself the same question – from commodities to stock markets, how bearish are the bulls?

The key here is that most of the bears who locked arms with me at this time last year (Roubini, Rosenberg, etc…) are still ragingly bearish. It would be really mean to kick off 2009 rhyming off all the bulls who have recently turned bearish, and I’m really going to try to be “nicer” in 2009, so I won’t go there… but the reality of it all is that I can’t, for the life of me, find anyone on the sell side who was bearish that is now bullish.  There are a lot of buy side PMs who get this, and there are 34 million online brokerage accounts in this country who get it… but consensus TV doesn’t get it yet… because no one from “Investment Banking Inc.” is allowed to get onto the You Tube, and “in their view” be bullish!

Now don’t get all horned up and charge ahead buying yourself SP Futures this morning. For the immediate term “Trade” I don’t like you buying the open. Inclusive of Wednesday’s +1.4% meltup, the SP500 has already tacked on +3.8% in the last 48 hours of trading, putting it’s “re-flation” from the November lows at +20% (which is why I made sales on Wednesday). Alongside volatility (VIX) being cut in half in the last 6 weeks, the trading range for the US market has narrowed materially. This, altogether, is bullish, but at a price. Buy low and sell high is the ole school game that’s back in town. Do not chase the pundit patrol this morning – wait.

Witness last year’s Asset Allocation “call of the year” (being in cash) or not buying into the vortex CNBC slogan of “free market capitalism is the best path to prosperity” while the US government was getting into the business of socializing corporate America’s losses… patience pays.

The bears are bearish, and the bulls aren’t bullish. Buy the SP500 on down days in the trading range that we have issued in the past few weeks – that remains 865-881. Make sales after +3-6% market moves. “Learn, unlearn, and relearn…” The future for the new American capitalist, who sees the opportunity of The New Reality, couldn’t be more bullish, at a price…

Best of luck out there in 2009,

How Bearish Are The Bulls? - etfs010209

2008 US Market Returns

Index Performance:

DJ (0.6%), SP500 +0.8%, Nasdaq +2.70%, Russell2000 +5.6%

DJ (19.1%), SP500 (22.6%), Nasdaq (24.6%), Russell2000 (26.5%)

DJ (33.8%), SP500 (38.5%), Nasdaq (40.5%), Russell2000 (34.8%)

OIL: Climbing Everest

Suffice to say, for all of this week, the pundit patrol was out in full force, pushing their newfound $25/oil thesis.

Admittedly, not all of these pundits were pushing their own books into year end. “Fast Money’s” beloved commodities “guru”, Dennis Gartman, wrote this morning that they recently “forced ourselves to discontinue trading” – generally people don’t do that if they are making money. Gartman had no book to push.

Gartman’s daily note is one of the better one’s in the market place, but this morning’s marked a peak in pessimism for the crude bears. For those who were “long of” oil this morning, Gartman warned “they must first overcome this almost impossibly huge carrying cost… they may, but it is and Everest to climb…”

Indeed, oil has climbed Everest’s wall of worry today… indeed.

See the “re-flation” chart below. By my math, this was a +14% intraday move!

Volume in the USO is huge today – this is an ole fashioned short squeeze. Since I am “long of it” in our virtual Portfolio, I’ll sell high here, and revisit on a down day in the New Year. I don’t think I am going to get double digit oil “re-flation” again on Friday!

Happy New Year to you and your loved ones,

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The Data Point Bears Couldn't Afford

Never mind all of the reasons that the revisionist economists are citing for the drop in this morning’s weekly jobless claims – the bottom line is that the # came in way lower than expectations, the SP500 continues to climb it’s wall of worry as a result.

Market’s move on expectations, not what your CNBC media entertainers attempt to explain AFTER those market’s have moved.

Initial Claims came in at 492,000 – that’s 94,000 lower from last week, and 60,000 lower than the 4 week moving average (see chart below).

While we do not manage risk on one week data points, we do manage it proactively toward what may occur on the margin, relative to expectations.

Goldman, and whomever remains in the ‘Investment Banking Inc.’ camp that is calling for the apocalypse of a 2009 US Employment picture might want to call their geopolitical departments and re-run their numbers. Oh wait, do they have people who analyze political tail risk in their models?

The USA has lost 1.9M jobs this year. Obama will be adding 3M. We proactively predicted a 6-7% unemployment almost one year ago today (unemployment is now 6.7%)… we are not proactively predicting that we hit the 1982 unemployment peak rate, nor are we ready to take our estimate above 8%. As the facts change, we will… an important one changed on the jobless claims front today.

Keith R. McCullough
Research Edge LLC

Thanking You

Thanking You - asset allocation123108

“We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds”
-John Paulson (December 2008 Paulson & Co. letter to investors)

In December of 2007, most of those who gave me their attention recall my introduction of a pending investment theme for the hedge fund community (for 2008) called “Redemptions and Litigations.” I lost some so-called “friends” in the business for taking a stand on that front – other than being in the business for 10 years, who was I to question the golden geese?

While most are sending around their revisionist historian year end “review” today, I am locking arms with you, our clients, and moving this ball forward. The aforementioned Paulson quote is, of course, from THE Paulson who was right in 2008. The one who manages $36B, knows how to manage risk in down markets, and knows exactly what to do to his competitors when he sees them making excuses.

“John Paulson blasts hedge fund managers” – that was good enough for the Top 3 on Bloomberg this morning, so it should be good enough to get me out of the dog house of being the antichrist of the “hedgies”. My New Year’s wish has already been fulfilled – not all hedge funds are “hedgies” - thanking you, God!

Looking ahead is always more challenging than looking back. Looking back provides you with lessons to improve your process. Looking forward provides the tremendous opportunities associated with The American Dream – on Wall Street, they call it “making the call.” On Main Street, they call it “getting it right.” On field’s of professional sports, they call it “winning.” That’s my prediction for 2009 – winners and losers will continue to differentiate themselves. There is no such thing as a free lunch anymore. This is not a time to throw up “gates.” It is time for our industry to abide by the client’s expected principles of transparency, accountability, and trust.

We’re all done with the “Investment Banking Inc.”, “Private Equity Mania”, and “Hedgie” calls. We’re all done with that other Paulson, because in t-minus a few days, he’s as gone from this global macro picture as are the three aforementioned fascinations.

We’re looking forward to new leadership. We’re looking forward to risk management. We’re looking forward to seeing The New Reality play itself out.

So what’s “the call" Mr. KM? What do we do in the new year? Well… to borrow one of the greatly overused lines in corporate culture, “those are great questions!”

In The New Reality, however, what we do is do what we have been doing. We get our feet on the floor earlier than the competition, and we grind through the morning’s facts around the globe. As the facts change, we will. That’s pretty much it.

This morning’s positives far outweigh the negatives. This is the developing “Trend” of The New Reality. So on a day when everyone who is travelling is saying “it’s quiet” out there, allow me to submit a list of 9 real-time global facts that juxtapose that narrow conclusion:

  1. The SP500 had its best move in 2 weeks yesterday, putting its “re-flation” to 18.4% from the 2008 panic low of 752

  2. The range of the SP500 continues to narrow as volatility continues to crash; the VIX is at 41.63, down -48.5% from its 2008 panic high

  3. The US market’s breadth continues to expand, yesterday’s advance/decline line was lopsided to the bull side at 79% vs. 19%

  4. The Asian Equity market continues to “re-flate”; Hong Kong closed up another +1.1% overnight, taking its gains to +30.6% since it’s November low

  5. The European Equity market is putting in day 3 of its immediate term squeeze rally; the FTSE is +1.3% - that too is +18% higher from its lows

  6. The Equity markets levered to global “re-flation” (Brazil, Russia, Canada, Australia, etc…) continue to make higher lows

  7. The CRB Commodities Index is stabilizing in the range where we have issued our 1st bullish buying signal in years (CRB 209-219)

  8. The “re-flation” leading indicator correlation (Gold vs. the US$) continues to signal buy Gold (GLD), short UUP (US Dollar etf)

  9. The Reference Rate (3-mth LIBOR) is down again today at 1.44%; breaking down as global market sentiment indicators make higher lows

I usually stop at nine, simply because everyone else issues their “top 10.” Why is consensus 10 instead of 9 anyway? Why does everyone agree to agree that the 200 day moving average is “the line”? Why did we believe in the “golden era” of all that was levered up?

The year-end review, should be about asking THE QUESTIONS that no one has either asked, wants to ask, or in the hallowed halls of the Street’s investment elite is ALLOWED to ask. I have only had 10 years watching this story play itself out, so you don’t have to take it from me… but if John Paulson signs off on this line of thinking, will you take it from him?

I love THE questions; I love THE debate; and I just love THE game. Thank you for putting up with my rants this year. Thank you for letting me express my investment ideas in an unencumbered forum.

Thanking you all for giving my team and me the opportunity to be a part of your investment debate in 2008. We’re looking forward to earning your trust in 2009 and beyond.

Best of luck and health to you, your respective teams, and families for the new year.
Keith R. McCullough

Thanking You - etfs123108


We all know business in the gaming sector is tough, as it is for most consumer discretionary industries. Unlike the regional markets, Las Vegas is getting smacked around on two fronts. Visitation is down huge, but so is gaming revenue per visitor. In fact, the downward trajectory in gaming revenue per visitor is greater. Not to throw salt into the wound but this analysis excludes plummeting room rates, which is a much higher margin revenue source than gaming.

As the following chart shows, the year-over-year changes in win per visitor and total visitation tracked each other pretty closely until to the boom years in the middle of the decade. No doubt fueled by the positive wealth effect of skyrocketing housing prices, customers spent like drunk sailors not only in the casino but on room, food & beverage, retail, and entertainment. The planes and rooms were already full, so casinos jacked up room rates, table betting minimums, ticket prices etc, and they tightened the slot odds. All of this contributed to inflated spend per visitor.

We’ve got a long way to go before this bubble completely deflates. It’s payback time for the consumer.

The spending bubble is deflating

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