The Lighthouse

This note was originally published November 30, 2011 at 07:49 in

“Cernowitz proved to be Schumpeter’s lighthouse.”

-Sylvia Nasar

 

In her outstanding chapter on Creative Destruction, Sylvia Nasar captures the most critical moment of a creative thought by comparing Joseph Schumpeter’s time at the University of Vienna to Albert Einstein’s at the Bern patent office (1902-1909).

 

“It gave one time to think one’s thoughts and, of course, to write them down. It also cut down on the distracting buzz of other people’s ideas.” (Grand Pursuit, page 187)

 

For the those of us who didn’t blow up other people’s money in 2008 (and again in 2011), we look and feel confident into year-end for good reason. Whether it’s me writing to you at the top of every risk management morning, or you delivering on Warren Buffett’s #1 Rule of Investing (“Don’t Lose Money”) for your families and clients – it’s all one and the same thing. Winning.

 

Together, we’ve travelled the often broken road of groupthink and we’ve seen the investment stars of bull markets rise and fall.

 

We are Wall Street 2.0. We are the change people can believe in.

 

Back to the Global Macro Grind

 

From what I can discern, there are two very different types of players on this globally interconnected market’s ice right now:

  1. Those who have stayed the course with the fundamental research call of 2011 – Global Growth Slowing
  2. Those who wake up every morning looking for a central planner to bail them out

Watching the US Equity futures trade this morning captures the essence of how short-term the group-thinking associated with the Type 2 Player in this game has become:

  1. At 4AM EST, I jot down in my trusty notebook “China down -3.3% to down -16.9% YTD, testing October lows”
  2. At 6AM EST, headline hits “China cuts reserve requirements, 50 basis points”

First, set aside the fact that few, if any, market sources even mentioned point #1 (no surprise there) and then realize that the S&P futures went from down 8 points to up 8 in a nanosecond of what could be best described as media panting about point #2 on Twitter.

 

Twitter, you see, is replacing what Old Wall Street calls “the tape.” On Wall Street 2.0, tweeters with analytical competence not only capture the China like headline “news” in real-time but have it synthesized within seconds.

 

Being fast isn’t being a “short-term” investor. It’s just called being smarter and faster.

 

Back to the China thread…

 

Sometimes getting your brain somewhere fast helps you recognize you need to slow down. Doing nothing in a market that’s trading on the “distracting buzz of other people’s ideas” of what the headline actually means is critical. The media’s immediate-term reaction to an alleged 1.3 TRILLION Eurocrat bazooka in late October is a good example of that (i.e. they don’t have one yet).

 

What does China’s decision to cut reserve requirements on banks mean?

 

It means China’s economic slowdown is accelerating on the downside, big time. The Chinese act, proactively, when they see a domestic demand problem.

 

What happens as the #1 unlevered growth engine of the world slows from double digit GDP growth to mid-single digits? You don’t even have to think too hard to figure that answer out. Global Growth Slowing matters to market multiples.

 

Context:

  1. The last time China started cutting reserve requirement rates was September 2008
  2. China continued to cut those rates until December of 2008
  3. US stocks didn’t stop going down until March of 2009

If you didn’t know that most US centric “stock pickers” are growth investors, now you know. As growth slows, stocks fall. Pull up charts of Apple, Amazon, or American Airlines (kidding – just needed another company starting with an A for literary purposes) and you’ll see, quite clearly, what the market is already discounting about Q4 versus Q3 Global Growth and demand.

 

If you flip a switch back to how that Type 2 Player continues to play the game – the Top 3 Begging For Bailouts headlines they are looking for are now as follows:

  1. European “shock & awe” money printing
  2. Fed getting sucked into to a QE3
  3. China rate cuts

From the vantage point of The Hedgeye Lighthouse this morning, all I have to say about all 3 of those options is that the Type 2 Players better be very mindful of what they wish for. Growth Slowing is a requirement for all three.

 

My immediate-term support and resistance ranges for Gold, Brent Oil, French stocks (CAC40), Amazon, Apple, and the SP500 are now $1661-1732, $108.53-110.59, 2923-3067, $177-209, $361-385, and 1147-1203, respectively. Lower-highs across the board.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Lighthouse - Chart of the Day

 

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