Santa Mario

This note was originally published at 8am on November 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We should not be waiting any longer.”

-Mario Draghi

 

In one of the more suspicious central planning moves to-date, it appears that the new Italian Chief of Central Planning, Mario Draghi, is working on changing the date of Christmas.

 

Santa, as you can see, is really red. This whole thing about the Nasdaq and US Small Caps being down for 3 consecutive weeks in November (SP500 down -3%) has Bernanke’s central plan for reaching “escape velocity” from the chimney under fire too.

 

If Americans and Europeans change all of the rules and all of the dates, there’s really a lot we can do. You see, this is what these people fundamentally believe – they can save us from, well, just about any problem they perpetuate.

 

The aforementioned quote came from Santa Mario this morning where he started calling out the Germans in Frankfurt. “Where is the implementation of these long standing decisions?” Draghi asked.

 

Q: Qu’est ce qui ce passe avec Le Bazooka pour les banks? demanded Monsieur Sarkozy.

 

A: “If politicians believe the ECB can solve the problem of the Euro’s weakness, then they’re trying to convince themselves of something that won’t happen.” –Angela Merkel

 

Bad German Santa. Bad.

 

Back to the Global Macro Grind

 

Yesterday I covered shorts and bought some of our Hedgeye Best Ideas on the long side (ask sales@Hedgeye.com for the replay of our analyst team’s Best Ideas Call from last Friday), taking my net long position in the Hedgeye Portfolio to one of its most bullish leans in November (12 LONGS, 8 SHORTS).

 

That doesn’t mean I believe in Le Pere Noel or that a few Keynesians by the name of Mario are going to save me on the long side either. It simply means that I am doing what my risk management process allows me to do – Fade Beta.

 

Fading Beta means buying on red and selling on green. It’s not as complicated as figuring out the European catalyst calendar. It’s just math. I base these decisions on a model that I’ve built. I don’t have to ask my boss for permission to act on its signals.

 

The risk management signals aren’t perfect, but they’ve been better than being Bad Beta in November. We’ve booked 13 consecutive gains on the long side of the Hedgeye Portfolio and have gone 17 for 19 in November. Beats believing in Santa too.

 

Like all of you, I’m proud of my team and process when they are working together. I’m not a whiner. I celebrate winning. And hopefully that message is resonating with your process. At the end of the day, this business is all about the score. Winning matters.

 

Where do we go from here?

 

On the bounce, sell on green, again.

 

Why?

 

All low-volume rallies to lower-highs in Asian, European, and US Equities are to be sold until consensus fundamentally starts to come to grips with what the Germans are saying. 

  1. If any European banks are going to be bailed out, German banks get to go first (Deutsche Bank, Commerzbank, etc).
  2. If any French or Italian banker thinks Lagarde or Draghi are getting them a priority pass ahead of German banks, they should think that through again…
  3. If and when all of these Greek, French, Italian, etc banks prove that they can’t raise money (read: secondaries in the public market), they have to tap their sovereign leaders first, then start begging for the EFSF funding. 

Like intermediate-term tops in markets, the deleveraging of balance sheets is a process, not a point. There have been plenty of points in the last 3 to 24 months where pundits have made the call that “this is it – this is the bottom for the banks”, but the process of marking bank stocks and their equity values to market continues to trump all hopes.

 

Hope (and begging for Santa Mario), is not a risk management process. And “printing money”, according to Merkel’s spokesman on the economy this morning, “… at the end of the day means inflation…” and “every German is very much scared about inflation.”

 

As Ben Bernanke anchors on the 1930s (instead of the 1970s Stagflation), the German Zeitgeist is anchoring on the 1920s. Interconnected risk is not managed on one duration to suit the needs of one country’s central banking narrative over another’s. Interconnected risk is multi-duration, multi-factor, and global.

 

If you don’t get that yet, you probably still believe in Santa coming this November too.

 

My immediate-term support and resistance ranges for Gold (bought more yesterday), Oil (Bullish Formation and inflationary), French CAC (Bearish Formation), and the SP500 (Bearish TAIL; Bullish TREND) are now $1722-1778, $98.12-101.96, 3002-3146, and 1212-1239.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Santa Mario - Chart of the Day

 

Santa Mario - Virtual Portfolio


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