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Prophecies of a Risk Manager

This note was originally published at 8am on April 13, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“One need not be a prophet to be aware of impending dangers.”

-F.A. Hayek

 

With the US stock market down for its 4th consecutive day yesterday I moved to our most invested position of 2011. The Hedgeye Asset Allocation Model now has a 37% position in Cash and the following allocations:

  1. Cash = 37% (down from 52% last week)
  2. International Currencies = 30% (Chinese Yuan, Canadian Dollar, British Pound – CYB, FXC, FXB)
  3. Fixed Income = 12% (Long-term US Treasuries and a US Treasury Flattener – TLT and FLAT)
  4. US Equities = 9% (Dividends and Technology – VIG and XLK)
  5. International Equities = 6% (China – CAF)
  6. Commodities = 6% (Gold – GLD)

This certainly doesn’t imply that I am a raging bull. Neither does it suggest that I am a raging bear. I really don’t think there’s a lot of value in being raging anything when you are tasked with being a Risk Manager.

 

In the past week I’ve moved from a zero percent asset allocation to US Equities to 9%. With virtually every sell-side strategist cutting their US GDP Growth estimates, and the US stock market’s price now down for the month-to-date, expectations for Growth Slowing As Inflation Accelerates are starting to get priced in.

 

JP Morgan’s earnings can be as good today as Alcoa’s were bad yesterday – then Bank of America can have no earnings on Friday. Managing risk in an environment where everyone isn’t a winner on earnings day anymore is going to present tremendous opportunities for the proactively prepared.

 

One of the hallmarks of effective risk management isn’t just having it in you to short and/or sell things when they are up – it’s having a repeatable risk management process to cover and/or buy them when they are down. Some people in this industry will tell you they can’t do that because that’s called “market timing.” And if you saw what some of these people do when under pressure, you should definitely take their word for it on that.

 

I’ve made two “Short Covering Opportunity” calls in 2011.  The first was on March 16th and I made the second one intraday yesterday (send an email to sales@hedgeye.com if you’d like our intraday Risk Manager notes). That’s not me pumping my own tires – that’s just me telling you what I did.

 

Short Covering Opportunities in these interconnected times aren’t raging bull calls to action. In this case I see every opportunity for the SP500 to bounce to another lower-long-term-high and lower-immediate-term high up at 1328. Then you start making sales again. If it’s not in your investment mandate to manage risk on a short to intermediate-term basis like this, that’s cool. I don’t have that mandate.

 

If the US stock market sees a breakdown below 1310 and Volatility (VIX) breaks out above $18.03 (intermediate-term TREND line resistance) again, this call to cover shorts and get more invested will likely be a bad one.

 

Why would it be a bad one? Because I made a short-term risk management decision to get longer yesterday in the face of mounting long-term risks. This is what we call Duration Mismatch – and every Risk Manager is hostage to its uncertainties.

 

Notwithstanding that the world’s reserve currency (US Dollar) has gone no bid and appears to be on a crash course to nowhere, here are some of the other major market risks that I called out on Thursday April 7th (before this 4-day correction in US Equities, Commodities, etc.):

  1. Hedge fund net leverage in February 2011 hit its highest level since October 2007 (the last market top)
  2. Hedge fund net-long exposure to Commodities has eclipsed the prior 2007-2008 peak in 2011 (special thanks to The Bernank)
  3. Institutional Investor’s Bullish-to-Bearish weekly survey just tanked to one of its lowest Bearish readings ever

The good and bad news is that all of these factors change in real-time. While it probably felt pretty cool to be levered-long oil and everything that is The Inflation trade last week, it didn’t feel so good yesterday – or the day before that. From their YTD highs last week, the price of oil (WTI) and energy stocks (XLE) are down -5.8% and -5.7%, respectively, in pretty much a straight line. Yes, chasing The Bernank’s Beta can leave a mark.

 

So… after prices fall:

  1. The largest net-long commodities position EVER in the hedge fund community will come down…
  2. The widest spreads ever between Bulls and Bears in the Institutional Investor weekly sentiment survey will come in…

And we’ll all go on in life dealing with the today.

 

Not surprisingly, today’s Bullish-to-Bearish weekly survey saw the spread between Bulls and Bears narrow by 2 points to +38 for the Bulls (down from last week’s +41). And the prophecy of this Risk Manager is that this spread will narrow again next week. At only 16.3% of institutional investors admitting they are Bearish, that number only has one way to go when stocks and commodities come down like they just did – and that’s up.

 

My immediate-term support and resistance levels for oil are now $105.23 and $109.02, respectively. My immediate-term support and resistance levels for the SP500 are 1310 and 1328, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Prophecies of a Risk Manager - Chart of the Day

 

Prophecies of a Risk Manager - Virtual Portfolio


The Week Ahead

The Economic Data calendar for the week of the 18th of April through the 22nd is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - callme1

The Week Ahead - callme2


Q2 KEY MACRO THEMES REPLAY PODCAST & SLIDES

Q2 KEY MACRO THEMES: FINDING STABILITY AMID HEIGHTENED VOLATILITY  

REPLAY PODCAST & SLIDES

Today, April 15, 2011, 11am EDT

 

Valued Client,

 

Hedgeye's Macro Team, led by CEO Keith McCullough and Managing Director Daryl G. Jones, recently hosted their quarterly themes conference call. The key topics included: 

  • Year of the Chinese Bull (Bullish on Chinese equities and the Chinese yuan)
  • Deflating the Inflation (Inflation Scenario Analysis)
  • Indefinitely Dovish (U.S. Interest Rate Scenario Analysis)

******************************************************************************

 

Replay Podcast:

http://www.hedgeye.com/feed_items/12926

 

Presentation Slides:

http://docs.hedgeye.com/2Q11%20Key%20Macro%20Themes2.pdf

 

If either hyperlink fails to work, please copy & paste it into the URL of your browser.

 

Regards,

 

The Hedgeye Macro Team


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Buying Greek Islands Cheap

Today the Greek government announced that it will issue an additional €26 Billion in austerity measures and sell €50 Billion in state-assets to meet its targets to reduce the country's public debt and deficits. Bottom line: Greece is accelerating its position on the road to the Keynesian Endgame.  While the measures announced today may at best quell investor fears over the short run, longer term the government is putting another band-aid over the deep fiscal imbalances that are not being properly accounted for by the government.

 

So what’s on the chopping block? The Greek Finance Minister put to auction today stakes in the Hellenic Telecommunications Organization (HTO) and Public Power Corp (PPC), estimated to yield €15 billion by 2013 and €50 billion by 2015.

 

With Greece’s debt estimated to ramp to 159% of GDP in 2012, and expectations to cut the budget deficit from a high of 15.4% of GDP in 2009 to 3% by 2014, as the government works against €13.1 Billion in debt (principal and interest) due in the months of April and May (of the some €42.5B due this year), while the Greek 10YR yield rips to over 13% -- we’d say the country is 1.) going to need a far greater life line and/or solution to restructure its debt, and 2.) rife for some more civil unrest.

 

In the meantime, be patient and wait for your price on a beautiful Greek island to call your own. Bon weekend!

 

Matthew Hedrick

Analyst

 

Buying Greek Islands Cheap - greek island




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