Theory vs Practice

This note was originally published at 8am on October 04, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“In theory there’s no difference between theory and practice, but in practice there is.”

-Yogi Berra

In theory, money printing and piling more debt-upon-debt was going to save the world’s biggest banks. In theory, Old Wall Street had Ben Bernanke’s back on +3-4% US GDP Growth for 2011. In theory, the Yankees should have beaten the Detroit Tigers last night too.

Then again, I’m a conflicted, compromised, and constrained Yankee fan – and with that theory, I may as well be a Keynesian this morning. In practice this is called marked-to-market risk management and the question this morning isn’t an ideological one – it’s, what do you do?

When I joined the hedge fund elite 12 years ago, I didn’t have to have a Global Macro view. Today, I do. In practice, this game of Globally Interconnected Risk is A) always on and B) always changing. Today, I have to play the game that’s in front of me.

Back to the Global Macro Grind

Immediate-term TRADE oversold is as oversold does. Today we’ll register the 3rdShort Covering Opportunity we’ll have called for in the last 2 months (the 1st call we made to cover shorts on August the 8th, 2011).

Here are the US Equity, Commodity, Currency, and Fixed Income factors that help me decide what we do now: 

  1. The SP500 is immediate-term TRADE oversold in the 1180-1197 range
  2. The Volatility Index (VIX) is immediate-term TRADE overbought at 47.11
  3. This is the first day in the last 6 trading days in US Equities where there’s more immediate-term upside vs downside
  4. The US Dollar Index is immediate-term TRADE overbought at $79.43
  5. The Euro/USD pair is immediate-term TRADE oversold at $1.31
  6. WTIC Oil is immediate-term TRADE oversold at $76.19
  7. Copper is immediate-term TRADE oversold at $2.95/lb
  8. US Treasury Yield Spread is putting in an oversold YTD low of 153 basis points wide
  9. US Treasury 2-year Yields are holding immediate-term TRADE support of 0.21%
  10. Goldman is cutting their Global Economic estimates across the board 

On top of the price/volume/volatility signals that help construct the 10 aforementioned factors in my model, we have a very newsy event on the tape with Deutsche Bank’s CEO (Ackerman) guiding Q3 down, big time.

In theory, this is all bad. In practice, a lot of what Goldman and Deutsche Bank are saying isn’t in the area code of what Hedgeye clients would consider new. Our Managing Director of Financials research, Josh Steiner, has been bearish on the banks since February.

The US Financials ETF (XLF) is down -29.3% for the YTD. That’s called a crash – and it’s readily apparent in the rear-view mirror. So is the SP500 having collapsed -29.8% and -19.4% from their October 2007 and April 2011 easy-money highs.

Today is a day to notice what no one will be focused on. In theory, your Risk Manager should have a process to impute everything that’s happening in the world as of last price. In practice, most money managers will be freaking out this morning making emotional decisions.

Capitalize on that.

What do I see that’s better than bad that people aren’t talking about this morning? 

  1. South Korean inflation (CPI) dropped sequentially to +4.3% for SEP versus +5.3% in AUG (on the margin that’s not bad)
  2. Chinese non-Manufacturing PMI rose sequentially to 59.3 for SEP versus 57.6 in AUG (China is not collapsing, yet)
  3. USA’s ISM report for SEP rose sequentially (month-over-month) to 51.6 versus 50.3 in AUG (Growth Slowing? not new) 

Again, I’m not calling for a new bull market. Neither am I saying that Growth Slowing has ended. I am simply suggesting that you see this for what it is in most things US Equities (and some things Asian and European Equities) this morning – a Short Covering Opportunity.

My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1554-1672 (Gold is now bearish TRADE and TREND), $76.19-81.09 (Oil remains in a Bearish Formation – bearish on all 3 of our risk management durations), 5091-5439 (that TRADE line break in the DAX yesterday mattered), and 1080-1130, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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