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Gravity's Bark

This note was originally published at 8am on September 14, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Gravity is only the bark of wisdom’s tree, but it preserves it.”

-Confucius

 

I am definitely not as long as I was 24 hours ago. This morning’s Global Macro Grind is just not good.

 

So before I get into Geithner, Lagarde (IMF), and Barroso (EU) policies to suspend gravity, let’s go through that grind and take a walk down the world’s fundamental path of a continued Growth Slowdown:

  1. JAPAN – Japanese stocks fell another -1.1% overnight to a fresh 18 month low. It’s not “headline” news, but that doesn’t mean that one of the world’s Top 3 economies ceases to exist. This remains the land of Keynesian nod.
  2. KOREA – as in the South side, saw its main stock index (and really one of the biggest leading indicators for industrial and tech demand, globally), the KOSPI, collapse for another -3.5% move overnight. Since May, the KOSPI has crashed (down -21.5%).
  3. CHINA – Chinese stocks bounced “off the lows” to close up +0.55% overnight. While we highly doubt that the best “idea” the Chinese have is investing in Berlusconi Bonds, they are captive to a Global Growth Slowdown, even if they don’t perpetuate it.
  4. GERMANY – the train wreck that has become the German stock market crashing continues. When I write the word crash, I mean it, literally. If the SP500 was down as much as the German DAX since May (down -33%), the SP500 would be testing the 900 level and Geithner would be promoting a $3 TRILLION TARP at today’s Delivering Alpha Conference.
  5. ITALY/SPAIN/GREECE – dead cats bounce all of the time in a global economic system where the suspension of gravity remains the primary policy – but they bounce to lower-highs. And unless Lagarde (IMF) and Barroso (EU) start TARPing these pig banks in the coming days, both the Euro and these European crash markets will come under further selling pressure.
  6. RUSSIA – yep, they’re still around but what was The Inflation Trade bid (USD Down, Oil Up) of Q1 2011 (QE2) in the Russian stock market is now gone. The RTSI index is down again this morning and testing fresh YTD lows.
  7. BRAZIL – like many of the countries in Asia, the Brazilians appropriately raised interest rates when the US should have and can now start cutting them. This has Brazil looking a lot better than most European and US stock market indices all of a sudden but, again, cutting interest rates requires fear mongering (ie Growth Is Slowing people), so plenty to ponder there.
  8. CANADA – if all Keynesian Policy finger pointing fails, Geithner can still blame Canada.

Sorry. Did I say I was going to wait until I addressed the Fiat Foolery of Geithner, Lagarde, and Barroso? I couldn’t help myself.

 

Sadly, Gravity’s Bark will have to deal with these people intervening in what were our “free” market lives until they sufficiently blow this entire thing up.

 

Obviously Greek bonds, Italian stocks, and US Financials have been blowing up since February. This is not new. What is new is that consensus has been forced to realize that policy perpetuates the growth slowdown problem as opposed to rescuing it.

 

Geithner loves this stuff. He’s a big Anti-Gravity guy. Spending 47% of his born life at the US Treasury and Federal Reserve (New York Banker kind) and not accepting any responsibility in his policy recommendations across 23 years of his being on the Big Government Intervention team is impressive. That’s what gets you the nod as a keynote to generate some alpha!

 

As for what France’s lovely Christine Madeleine Odette Lagarde (new head of the IMF post the other French guy having some transparency problems) and Jose Manuel Durao Barroso (President of the European Commission) can do to drive some volatility in these very price stable and socialized markets … let’s consider their options:

  1. TARP the Europig Banks with some Geithner/Paulson policy (that’s what the EFSF is – a hybrid TARP)
  2. Start issuing some Eurobonds so that the Europig Bonds get a little lift from the German Bund mix
  3. Fire Greece out of the EU

Fire, as in the “rapid oxidation of a material in the chemical process of combustion” (Wikipedia). Or, as in firing the Greeks (after the Troika meetings) for lying about their numbers. There may not be gravity in the Fiat world – but there will be fire!

 

This is obviously a gong show at this point and, as a result, I see no reason not to trade this Global Macro market risk aggressively.

 

Rick Perry went with the “treason” thing. And Jamie Dimon opted for the “blatantly anti-American” thing.

 

I am going to go with fading the anti-gravity thing.

 

My immediate-term support and resistance ranges for Gold, Oil, Copper, Germany’s DAX, and the SP500 are now $86.18-90.11, $1808-1846, $3.93-4.04, 4889-5314, and 1141-1181, respectively. Don’t be ideological about all of this – just trade the ranges.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Gravity's Bark - Chart of the Day

 

Gravity's Bark - Virtual Portfolio



Unconscious Anchoring

“The anchoring-and-adjustment heuristic, as it is called, is unconscious.”

-Dan Gardner

 

I sold into the end of Friday’s 3-day rally, taking the Hedgeye Portfolio to 11 LONGS and 8 SHORTS. Last Tuesday, I held my longest net long (longs minus shorts) position of Q3 2011. Short Covering Opportunities are fun when you get them right.

 

Do not confuse a Short Covering Opportunity with a change in the intermediate-to-long-term fundamental reality that Global Growth Slowing is here to stay as long as the market keeps begging for Keynesian policy to bail us out. Remember, Big Government Intervention does two things to your markets and your lives: 1. Shortens Economic Cycles and 2. Amplifies Market Volatility.

 

Put another way (in Hedgeye speak), do not confuse a TRADE (immediate-term) with a TREND (intermediate-term) or TAIL (long-term). Since there is neither responsibility in Old Wall Street recommendations or an ability to be what we call Duration Agnostic when considering risk, you need to capitalize on the Sell-Side’s propensity to anchor on intermediate-term TRENDs, after they have occurred.

 

In “Future BabbleWhy Expert Predictions Fail and Why We Believe Them Anyway” (2010), Dan Gardner does a nice job simplifying this behavioral economics  concept of “anchoring” by citing The Wheel of Fortune Experiment by Daniel Kahneman and the late Amos Tversky. 

 

“Kahneman and Tversky showed that when people try to come up with a number, they simply do not look at the facts available and rationally calculate the number. Instead, they grab onto the nearest available number – dubbed “the anchor” – and they adjust in whichever direction seems reasonable. Thus, a high anchor skews the final estimate high; a low anchor skews it low.” (Future Babble, pg 100)

 

That’s Old Wall Street.

 

Using the #1 risk factor that we’ve been hammering on for all of 2011 (Growth Slowing), here’s how this looks from a Wall Street/Washington Strategist or “Economist” perspective: 

  1. Nearest Available Numbers: Q1 2010 US GDP = 3.94% and Q2 2010 US GDP = 3.79%
  2. Old Wall Street’s Adjusted 2011 US GDP Estimates (in Q1 of 2011) = up +3-4% GDP Growth for 2011-2012
  3. Actual Q1 and Q2 2011 US GDP numbers (subject to 30-81% downside revisions) = 0.36% and 0.98%, respectively 

And, kaboom.

 

But, but, but… this year’s -18% peak-to-trough drawdown in US Equities from the April 2011 peak was all about a tsunami in Japan and Europigs not getting their fiscal houses in order, right?

 

Right. Right.

 

So now Old Wall Street is cutting both their Global and US GDP Growth forecasts to the NEAREST AVAILABLE NUMBERS and we’re, as our friends in the media like to say, “off the lows”, with a nice +5.4% Short Covering Opportunity in the SP500 last week.

 

Nice. Really nice.

 

What else happened week-over-week that caught my craws attention: 

  1. US Dollar TRADE and TREND breakout holds support (this is new)
  2. CRB Commodity Inflation continues to break down (at the beginning of Q2 we called this Deflating The Inflation)
  3. As US Treasury Yields finally make higher-lows, Gold continues to make lower-highs (they are inversely correlated) 

So what did I do with that? 

  1. I made the US Dollar Index a 6% position in the Hedgeye Asset Allocation Model (UUP)
  2. I sold my long Silver position and remain very cautious on all commodity long positions other than Corn (CORN)
  3. I traded a proactively predictable range in the SP500 as its bullish on one duration (TRADE) and bearish on the other (TREND) 

If I have said this 10x in the last week in meetings and on the phones with clients, I have said it a 1000x in the last 3 years. The best path forward for American prosperity is via a strong US Dollar.

 

Strong Dollar Deflates The Inflation. Period. That’s why the US Consumer stocks act a lot better than the Financials and Industrial stocks. Some stocks might, but this country is not going to recover on “cheap exports.” The 71% of the economy that matters = US Consumption. Strengthen the US Dollar and rates of “risk-free” returns on savings accounts and we solidify American income and consumption.

 

If you’re holed up in some Old Wall Street Sell-Side office on Park Avenue and don’t get that trade, take a walk outside and ask an American retiree how he or she feels about The Mucker Plan – a strong US Dollar in the hand is better than a snaky Geithner and a Keynesian Europig in the bush. Anchor on that.

 

My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $$1, $86.26-90.11, 4, and 1183-1224, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Unconscious Anchoring - Chart of the Day

 

Unconscious Anchoring - Virtual Portfolio


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.65%
  • SHORT SIGNALS 78.64%

Apparel Pricing: Negative Trend

With all the talk about retailers passing through higher costs, we’re hardly seeing trends improve on the margin. Specifically, the last two months of apparel CPI have decelerated on the margin – at the same time we’re looking at our fourth consecutive quarter of inventories growing ahead of sales.  We still have about a year – that 12 months last we checked – before cost compares get ‘easy’. The apparel industry can’t afford to see its CPI roll until next summer. We have 3 quarters of earnings between now and then.

 

Apparel Pricing: Negative Trend - Retail vs. CPI



The Week Ahead

The Economic Data calendar for the week of the 19th of September through the 23rd 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 - 1.CL

The Week Ahead - 1.CL2


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