This note was originally published at 8am on February 11, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
Lorri: “So how does it feel to be the oldest rookie in the last 30 years?”
Jimmy: “I don't know... I'm tired.”
-Rachel Griffiths and Dennis Quaid in The Rookie
Alongside “Invincible” (starring Mark Wahlberg and Greg Kinnear in 2006), “The Rookie” (Dennis Quaid and Rachel Griffiths in 2002) is one of my favorite ‘true story’ Disney movies of the last decade.
I’m an athlete, so these are my confirmation biases. I get it. And I’m proud of it. While trading markets may not be a full contact sport, there’s definitely a score and the non-athletes in the game are some of the most competitive people I have ever played with and/or against.
There are plenty of Rookie Trader mistakes that people make in this business. I am certain that I have made all of them, multiple times. Most of the time, that’s the only way a risk manager can mature in this business – by learning with live ammo.
Currently, we have a Rookie Trader learning on the job as he trades America’s balance sheet. Like Jimmy Morris did, he has some of the credentials to play in the Big Leagues. He’s one of the oldest rookies we’ve put in the game. And, if you didn’t notice, on Wednesday in front of Congress, he looks tired.
Tired and old is hardly a bad thing. I’ll still put the original Thunder Bay Bear (my Dad) up against any young buck who wants to try to hold up a retaining wall (we might just have to jack him up with some coffee first!). But tired, old, and inexperienced is not the kind of trader I want at the helm of my firm or family’s future.
Every week the Federal Reserve issues its version of transparency and shows us both the size and components of the Fed’s balance sheet. In the last 2 weeks, this is what Ben Bernanke has been doing – buying bonds, aggressively:
- February 3rd – Fed balance sheet assets expanded +$25.9 BILLION week-over-week to $2.47 TRILLION
- February 10th – Fed balance sheet assets expanded $31.3 BILLION week-over-week to $2.50 TRILLION
Yes, I am capitalizing the B’s and T’s so that you can hear me now…
Over the same 2-week period, this is what the US Treasury Bond market was doing:
- Week of January 31st – 2-year UST yields were up +37% (week-over-week!) to 0.74% and 10-year UST yields were up +10% w/w to 3.64%
- Week of February 7th – 2-year UST yields are up another +10% this week to 0.81% this morning and 10s are up +5% w/w to 3.66%
So… what does this mean? drum-roll … The Rookie Trader at the helm of the US Federal Reserve is committing one of the cardinal sins of risk management – he’s getting bigger and more aggressive on the way down!
Again, remember that The Ber-nank’s promise of perpetually low interest rates and that the Quantitative Guessing II (QG2) is the elixir of Big Government Intervention life has A) never been tried before, B) no risk management scenarios in the case that the trade goes against him, and C) no one to tap him on the shoulder and stop him from trading.
When I was given my first book to trade in 2002 (at our hedge fund we called it a “carve-out”), I had 2 bosses and an entire trading desk overseeing everything I did. Stop losses, shoulder taps, personal embarrassment – there were plenty of governors managing my mellon. But this guy has none.
No real-time accountability. No modern day risk management system to stop him out. Nothing.
And this he’s betting with $25-31 BILLION DOLLARS a week!
To put those Burning Bucks in context for you… and yes I realize our entire culture and country is numb to what a US Dollar is worth anymore… pressing a one-way bet with $30 BILLION Dollars a week would be the equivalent of 3 Steve Cohens taking all of their capital and having them all buy the same security, at the same time, with no hedges and no other positions…
Welcome to Centrally Planned America 2.0. with the Rookie Trader starring as your Almighty Central Planner.
In other news this morning, as US interest rates continue to push higher (2-year yields are now up +166% since Bernanke made his QG2 promises of “low interest rates and price stability” at Jackson Hole), I see nothing but price volatility.
1. Pepsi (PEP) – a $100 BILLION snack and beverage company cut its EPS targets for 2011, and the stock hit a fresh 3 month low on big volume. Management cited soaring commodity costs and uncertainty about when the said US economic recovery will actually be felt by consumers.
2. Bunge (BG) – a $10 BILLION agribusiness and food service company said it would no longer issue earnings guidance because volatility in the commodity markets have made forecasting increasingly difficult.
3. Bolivia – a country with 11 million people saw its President, Evo Morales, pull himself from all public appearances as food riots have erupted across the country and Bolivian miners, who are evidently upset, are starting to throw sticks of dynamite at government people.
I know, who cares about Egypt, India, and Bolivia? The Rookie Trader says US Monetary Policy gone bad has nothing to do with what’s happening anywhere in the world, including his home team’s bond market.
My immediate term support and resistance levels for the SP500 are now 1311 and 1334, respectively.
Best of luck out there today and have a great weekend,
Keith R. McCullough
Chief Executive Officer