Feeling Good

“Feeling good about a judgment is a prerequisite to acting upon it.”

-Dan Gardner (Future Babble, 2010)

 

I moved the Hedgeye Portfolio to net short (more shorts than longs) for the first time since June 23rd yesterday.

 

Did I feel good about it? Did I feel as good as I felt about running net short in June of 2011? How good did I feel moving to one of my most net long positions (more longs than shorts) on August 8th, 2011?

 

The answers to these questions are uncertain. I never feel good about any position until it’s working. And there is usually a huge difference between what I am feeling versus what I am actually doing with my longs and shorts.

 

“Confirmation bias” is a term that was coined by cognitive psychologist and Master Chess player, Peter Wason, in the 1960s. Per Wikipedia, the simple definition of confirmation bias is the “tendency for people to favor information that confirms their preconceptions or hypotheses regardless of whether the information is true.”

 

Confirmation bias, as Dan Gardner astutely calls out on page 84 of “Future Babble – Why Expert Predictions Fail and Why We Believe Them Anyway”, “is as simple as it is dangerous.” As Global Macro Risk Managers, we need to be thinking long and hard about that.

 

“In Peter Wason’s seminal experiment, he provided people with feedback so that when they sought out confirming evidence and came to a false conclusion, they were told clearly and unmistakably, that it was incorrect. Then they were asked to try again. Incredibly, half of those who had been told their belief was false continued to search for confirmation that it was right.” (Future Babble, page 85)

 

Can you imagine if Wason’s sample study was today’s short-term performance chasing hedge fund community? Never mind half – that number would be a lot higher than 50%. After all, we hedge fund people were born on this good earth to be able to judge sales, margins, and “valuations” light-years beyond our contemporaries who are still caged up in the Bronx Zoo.

 

Back to the Global Macro Grind

 

While I was right in my call for a “Short Covering Opportunity” (time stamped 10:47AM August 8th, 2011) in early August, I was wrong last week in suggesting that the SP500 could breakdown to lower-YTD-lows.

 

Being wrong happens. Most people just don’t like to admit it does. The key in this profession is being right a lot more than you are wrong. And not being really wrong when you aren’t right.

 

When I decided to move the Hedgeye Portfolio to net short yesterday, it was a conscious decision based on my multi-factor, multi-duration, Global Macro Model – not solely on what the SP500 was doing.

 

That’s not to say what the SP500 is doing doesn’t matter. What it has been doing does too (SP500 returns):

  1. DOWN -22.7% from its October 2007 top
  2. DOWN -11.2% from its lower-long-term high established in April 2011
  3. UP +8.1% from its higher-immediate-term low established in August 2011

Now a Perma-Bull will quickly snort … but but but, “we’re up huge from the 2009 low.” And we all get where that is coming from – what the bull means is that the US stock market is up +78% from the 2009 low. His client’s money isn’t.

 

Math doesn’t uphold the principles of storytelling or confirmation bias:

  1. The SP500 lost 57% from October 2007 to March of 2009
  2. In order to “break even” on that loss, your buy-the-dip bull would need to be up +131% off the bottom
  3. That, of course, assumes he nailed every move along the way (for 3 years)

So when the manic media is hammering you with “Greek stocks are having their best day ever” yesterday (they did on a percentage basis), remember that on Friday Greek stocks had crashed (down -48% since February 2011) and they’d need to “rally” +92% “off the lows” to get you back to break even versus only 6 months ago.

 

Or how about Bank of America? How good am I “feeling” about shorting that stock again yesterday in the Hedgeye Portfolio?

  1. Early September 2010 when we were shorting BAC, the stock was at $13.21
  2. By August 23, 2011, BAC had lost 52% of its “value” in less than a year
  3. BAC needs to rally +110% “off the lows” to get back to a 1 year break even return

I didn’t feel good about shorting BAC yesterday. I felt as uncertain as I should feel when a short position is -11.28% against me. While our Financials Managing Director, Josh Steiner, and I have shorted this stock 10x since 2010 (and been right 10x), that and a case of Molson Canadians will maybe make us prolific horseshoe players down at the lake tonight – nothing more.

 

If I was being paid what I used to be overpaid working at hedge funds and I said that in a morning meeting, everyone who wanted me to fail would be whispering “uh, it doesn’t sound like Keith has conviction anymore does it”…

 

That’s Wall Street. They want everyone to be “Feeling Good” about their “best ideas”, all of the time.

 

My immediate-term TRADE ranges of support and resistance for Gold, Oil, and the SP500 are now $1, $85.03-88.62, and 1163-1219, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Feeling Good - Chart of the Day

 

Feeling Good - Virtual Portfolio


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more