Dark Moon

This note was originally published at 8am on March 10, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I like to think that the moon is there even if I am not looking at it.”

-Albert Einstein

On this day in 1973 British rock band Pink Floyd released the Dark Side of The Moon. In Hedgeye-speak, that album was multi-factor and multi-duration, focusing on the interconnectedness of the world. Money, war, and death – from time to time, these can be the dark sides of this world. Pretending that their impacts on human behavior cease to exist isn’t my view of a risk management process; neither is hope.

So far, the best strategy we can offer Global Macro Risk Managers is grounded philosophically in Chaos Theory. Some people call it Complexity Theory – mathematically speaking, Chaos and Complexity theories are pretty much the same things.

Much like Einstein’s aforementioned admission of a Dark Moon, there are some things in markets that you can’t see. But, from dark pools, to the “flows”, and inside information – it’s all there. No matter where your concept of your research “fundamentals” go, there it is – either by expectation or by the actual “news”, it’s always being absorbed into the market’s last price.

Where I used to get run-over in positions was when I considered my research on a company the center of the universe. As if Mr. Macro Market knew me and owed me something. You can go get yourself a Yale degree and draw up a “smart” looking slide presentation about your bottom-up investment thesis – and that investment strategy will be all good and fine, until it isn’t.

Usually what hits you like Big Alberta when he has you lined up at the blue-line with your head down is the macro. Or, as some bottom-up only investors like to call it, “the unknown.” Well that excuse, losing your investor’s money, and a few false teeth might get you a ride home on the bus, but it’s certainly not going to give you an entitlement to dress in the next game.

The next risk management game in a globally interconnected marketplace starts now. Like a good Chaos Theorist, you either wake up accepting that Global Macro market risk is grounded in uncertainty, or you don’t. Like the moon, Asian Growth Slowing and Greek Debt Imploding is still there this morning, even if you weren’t looking at it…

Here’s this morning’s Global Macro grind:

1.       Asian Growth Slowing As Global Inflation Accelerates

-Japan revised its Q4 GDP estimate LOWER again to -1.3% (don’t forget that the US has done the same with Q4 GDP, twice)

-China reported a huge sequential slowdown in Exports for February at +2.4% (lowest level of demand since early 2009)

-South Korea raised interest rates to 3% (2nd rate hike for 2011 YTD with the #1 reason being inflation)

2.       European Sovereign Debt Yields Rising As Global Inflation Accelerates

-Credit ratings being cut in Spain this morning aren’t leading indicators – and neither is the assumption that more debt will solve this

-Greek bond yields continue to rise to higher all-time highs (all-time is a long time)

-British and German Equity markets are breaking down through their respective immediate-term TRADE lines of support

3.       US Growth Expectations Slowing (finally) As Global Inflation Accelerates

-US Treasury yields are finally backing off (2s down to 0.68% this morning) dulling one of the “growth signals” the bulls had in FEB

-Oil prices remain elevated and impose a significant sequential tax on US consumption growth (Q4 avg oil price = $85/barrel)

-Volatility (VIX) remains well above our intermediate-term TREND line of support (18.08) as fundamentals challenge the “flows”

So, that’s what we call The Big Stuff here at Hedgeye. And the Risk Manager strategy is to stay ahead of The Big Stuff. Whether you are looking at a company from the bottom-up or a country from the top-down, Growth Slowing as Inflation Accelerates in your cost structure definitely matters.

The Big Stuff can also morph into consensus. For example, I think The Inflation that we’ve been belaboring since October is now becoming consensus. This is where managing risk gets a lot trickier. What’s priced in? How long can consensus be right?

Here’s some more Big Stuff with potentially long-term tails:

  1. A Super Sovereign Debt Cycle Structurally Impairing Long-Term Growth
  2. A Global Inflation and Unemployment Problem Inspiring Revolutionary Revolt
  3. A Global Belief In The Fiat Currency System Coming Under Attack

Again, like the Dark Moon – it’s all there…

So, we’ll keep focusing on what we see in our globally interconnected risk management model, trying our best to change our asset allocation and long/short positioning as consensus changes are absorbed into market prices.

My immediate term TRADE lines of support and resistance for WTI crude oil are $102.11 and $108.71, respectively. My immediate-term lines of support and resistance for the SP500 are now 1302 and 1334, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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