“I’ll study and get ready… and then, the chance will come.”
“Sully” Sullenberger was the pilot of US Airways flight 1549. Sully is what America has always been about – achieving greatness when faced with the darkness of adversity. Make no mistake, this Californian proactively prepared for the risks associated with flying. In fact, he did so for 40 years - a former U.S. Air Force fighter pilot, Sully served as an instructor and Air Line Pilots Association (ALPA) safety chairman, accident investigator, and national technical committee member. As the reactive investment bankers of horse and buggy whip thought processes past were crashing on Wall Street yesterday afternoon, Sully was landing safely just down the river.
At lunchtime yesterday, while Sully was going through the paces of his pre-flight process, the SP500 was credibly signaling a potential crash. As the US market broke down through what I had in my model as a 2 standard deviation 1 week move, trading down intraday to 818, my Partner, Todd Jordan asked me what I thought. With the SP500 -13% lower than where it had traded just one week ago, I said “Todd, if this market closes here, the only thing we have left is hope.” Todd said, well that’s not good, “because hope is not a process.” I agreed.
Hope is not an investment process, but that does not mean that it ceases to exist. When managing risk, you have to always consider both what no one thinks can happen and what people hope will happen. That’s the only objective way to move forward - because no matter where stock market prices go, there you are.
With the SP500 breaking through my 825 level, I immediately ran the math on a 3 standard deviation move, and sent an intraday note to our Macro clients flashing that crash level being in play down at the 776 line. While that was only -5% lower versus where we were trading, it was a full -18% lower than where those late to the 1st Obama December rally got piggy chasing in the first week of January. Was 776 probable? All prices are – and having seen the financials (XLF) already having crashed in 2009 to date, I was very much worried.
In addition to my SP500 red alert, my other 2 macro lines in the sand (VIX 54.86, Gold $809/oz) were under assault. I haven’t been glued to my screens like I was staring at them yesterday since September. The big difference between January 15th and September, of course, was that I was no longer 96% in cash. If we broke, I was going to feel it, big time.
Fortunately, Sully landed the plane, and everyone survived. Metaphorically, into the close the SP500 felt like it was rising as fast as that plane was coming down. The VIX backed off my line, and gold revived itself. This morning the VIX is at 51 and gold trading comfortably above support at $824/oz. I feel better, because on the margin, I couldn’t have felt worse.
Is it tough waking up trying to call global markets every day? You bet your Madoff it is. When I was growing up, I always wondered what my Dad must be thinking when he was waking up for his 6am shift. He is a professional firefighter, and his priority is to serve and protect – while I never thought our careers would be similar, I guess I should always remind myself to never say never.
I haven’t been paid Wall Street compensation in the last 6 months, but I certainly feel blessed with the life lessons of accountability and responsibility. When I wake up today, I feel like some people depend on me to manage risk. Even if I am not the “smartest” man on Wall Street, and if only I do this for a certain few, I feel like I am doing the right thing.
Doing the right thing when nobody is looking is what “Sully” was doing. On one shiveringly cold New York City afternoon, his blue skies turned dark – but he didn’t panic - he didn’t dial in for a bailout either. He just did what he proactively prepared himself to do, and he executed. After the plane landed, he walked the plane, end to end, twice – just to make sure everyone was safe… that’s the kind of American I can trust in.
The #1 and #2 read stories on Bloomberg this morning are about planes that crashed – Bank of America and Citigroup. These two Destroyers of Capital are finally on the tape this morning with some of the worst numbers that you’re ever going to see. Pandit and Lewis have managed through this crisis as close to the antithesis as Sully’s process gets. Is this a surprise? No. This is what Wall Street groupthink trained these men to do. There never was a proactive risk management plan – and now Americans have to bail them out, or we are all going down hard.
On July 11th 2008, I wrote an Early Look titled “What Is A Crash.” At the time, I took a lot of heat from people who I thought were my friends in this business – and in hindsight it all makes sense. A crash is what happens when something happens that no one can afford to predict. Never forget that most of Wall Street is a compensation structure – because the Street can’t afford to agree that the “improbable” is probable, doesn’t make their thought process right. When faced with the reality of the improbable occurring, people and compensation structures crash.
Other than Investment Banking Inc. having crashed, the Russians are crashing. As hard as it may be to swallow those two considerations in the same sentence, it remains The New Reality of 2009. Amidst a global re-flation of stocks worldwide this morning, there is only one market that is threatening to make lower lows, and that’s the Russian Trading System. Alongside the ruble having crashed (down -27% since oil peaked) at 566, the RTSE is testing its October 24th freak-out low of 549. Yes, America’s stock market narrowly avoided another crash versus expectations yesterday, but the XLF etf and RTSI index have not.
Meanwhile the Chinese stock market is up +5% in the last three days, making a bid for another breakout to new 3-mth cycle highs, and so are stocks on the Bovespa in Brazil, which close up another +3.1% yesterday.
Around the world, uncorrelated performance is manifesting itself across sectors and styles. If you are buying into the horse and buggy whip old boy network models of zero transparency and accountability past, I am proactively predicting that you will crash. If you are buying American - “Sully” style - you should be proud of what you own, and smiling as we head into Obama’s Presidency Day weekend.
“I’ll study and get ready… and then, the chance will come.”