Winning Trinity

This note was originally published at 8am on August 03, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Repetition, confidence, and passion. The trinity of Lombardi’s football success…”

-David Maraniss (“When Pride Still Mattered”, page 225)

You didn’t have to look too far to find some losers on Wall Street or in Washington yesterday. In many respects those two compromised and conflicted constituencies are now, sadly, one and the same. US GDP Growth is slower than Wall Street’s “smartest” thought, and Big Government Intervention continues to amplify market volatility.

At Hedgeye, we’re focused on winning. Instead of angling for incremental “edge” on when the next round of Quantitative Guessing is going to be unleashed; instead of taking on some orange jumpsuit risk for a super secret piece of information; instead of not evolving the risk management process – that’s it – we’re just focused on winning.

Winning’s Trinity here in New Haven, CT is no different than Vince Lombardi’s process: Repetition, Confidence, and Passion. What’s increasingly fascinated me about this profession is that the older I get, the less I find myself needing to explain these principles to a larger community of people. The said “leaders” out there who don’t get these things yet probably never will.

Back to the Global Macro Grind

First, let’s focus on the good news.

  1. US Equities we’re finally immediate-term TRADE oversold yesterday
  2. Chinese stocks only closed down 3 basis points overnight (0.03%)
  3. Congress is going on vacation

As for the bad news – well, this globally interconnected market had already signaled for you to get out of US and European Equities before yesterday’s capitulation, so today’s risk management signals in those markets are basically just a reminder of the same:

  1. SP500 intermediate-term TREND line = 1319 (broken)
  2. Russell2000 intermediate-term TREND line = 825 (broken)
  3. UK’s FTSE TREND line = 5955 (broken)
  4. German DAX TREND line = 7123 (broken)
  5. Italy’s MIB TREND line = 20655 (broken)
  6. Spain’s IBEX TREND line = 10269 (broken)

Why are all of these stock markets “broken”? I can assure you it’s not because my pre-schooler pulled up a 1-factor point-and-click chart of 200-day Moving Monkey averages. The answer is multi-factor and multi-duration. And everyone in this business who didn’t blow up in 2008 knows exactly what I mean by that.

In any multi-factor model, GROWTH should carry a heavy weighting. Economic Growth is either Accelerating, Slowing, or Unchanged. The biggest calls I’ve ever made in my young career of making “Macro” calls haven’t been on the long or the short side – they have been on the margin. And I don’t mean by levering myself up with margin – I mean calling the turns.

In my model, there are 3 STAGES in calling the turns:

  1. Identifying when the acceleration slows
  2. Asserting when the slowdown is accelerating
  3. Recognizing the deceleration of the slowdown

As of this morning, I am going to call these 3 STAGES Hedgeye’s Winning Trinity of global macro risk management.

This is a cool model because all of the tired Keynesians can try it at home. You know, whip some top-line assumptions around. Try some fractal math. And generally, just stop whatever it is that they were doing to completely botch calling both the 2008 and 2011 turns in global economic growth.

Now, Timmy Geithner, we know you are interviewing at an investment bank right now, so don’t spend too much time on this model until you are done making excuses for the last 47% of your born life in US government perpetuating America’s debt and deficit problems. We want you as a client, so we’ll save you some time here and tell you we are currently in STAGE 2.

In Japan, Europe, and the US, I don’t see a catalyst for moving to STAGE 3 (a deceleration of the slowdown) until at least Q4/Q1. In China we see this coming in Q3/Q4. That’s why we’re long Chinese Equities before we buy American.

Ours is a process that requires Repetition, Confidence, and Passion. Most of you wouldn’t be where you are today if you didn’t get the focus, discipline, and repetition part. In terms of the confidence and passion part, don’t be shy – if you find it, live it out loud.

My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1619-1669, $93.15-96.29, and 1252-1256, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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