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“The trick was to focus narrowly… on numbers: lot number, number of bidders, paddle numbers, bid steps.”

-Benjamin Wallace

I’ve recently jumped into The Billionaire’s VinegarThe Mystery of the World’s Most Expensive Bottle of Wine – and, I must say, I can’t put the book down!

The aforementioned quote scrapes the surface of British wine critic and auctioneer Michael Broadbent’s process. Born in 1927, Broadbent “was twenty-two before he tasted a top wine”, but started out in the business by simply “taking notes on every wine he tasted. He never stopped.” (page 27)

Neither have I.

Back to the Global Macro Grind

I have 1-2 pages of hand-written notes of every market day of my working life. I’m not saying that makes me anything other than what it makes me – maniacal about my process. The way that I learn is through repetition. If I write down market prices, risk management levels, and economic data points every day, I have a much higher probability of not missing something.

That’s The Trick.

As far as I can tell (so far), The Trick to this game is not missing when the big things, like Growth and Inflation, are changing. That’s why, in principle, our Macro Models are grounded in Chaos Theory – we embrace the uncertainty that each day brings, because we have no idea what is going to be the proverbial grain of sand that knocks down that perfect pyramid of market expectations.

For the last 3 weeks I have been calling out Growth Slowing As Inflation Accelerates as the #1 risk factor that’s changing on the margin. Changing doesn’t mean the market realizes it instantaneously like a Janet Jackson moment at the Super Bowl. The difference between what’s changing on the margin and when markets are forced to react to it is time.

Get time and price right, and you’ll get mostly everything in the market right. Looking at last week’s Global Macro Performance Divergences, here’s where you didn’t want to be long:

  1. Small Cap US Stocks (Russell 2000) = down -3.0%
  2. India’s stock market (BSE Sensex) = down -1.6%
  3. The Euro (vs the USD) = down -1.9%
  4. CRB Commodities Index = down -1.5%
  5. West Texas Intermediate Crude Oil = down -2.8%
  6. Gold = down -3.7%

Now if you were long the Venezuelan stock market (+8.6% on currency devaluation) or the US Dollar Index (+1.3% after Mitt Romney solidified the Republican base in Michigan and Arizona), you were just fine last week.

Or were you?

The Trick about markets is that the tricks are always changing. Causality and correlation are very often two very different things, but Correlation Risks can sneak up on you like a Chinese Growth Slowdown in the night.

China Slowing?

Apparently both the data that we have been discussing since we sold our long China (CAF) position on February 16thand the guys running the joint agree – China’s long-term GDP growth rate looks like it’s going to be a lot lower than the +9-12% it’s been tracking since 2009. China’s Premier Wen guided to a 7.5% number for 2012. Global markets didn’t like that.

In addition to the guide down of Chinese Growth Expectations, here was the Asian economic data that mattered most on the margin overnight:

  1. Chinese Services PMI dropped to 48.4 in FEB vs 51 in JAN
  2. Chinese Vehicle Sales are tracking down -3% year-over-year for 2012 YTD (worst start to a year since 2005)
  3. Australian Services PMI got smoked to 46.7 in FEB vs 51.9 in JAN

I know. That data can be tricky when you convince yourself that the bad January data in Asia was all about the Lunar calendar – until the February data rolls in even worse!

To be fair, some of the data for Asia in February has been as good as you should expect it to be with the calendar shift. But the problem from here isn’t January’s calendar or what your run-of the mill Keynesian economist is going to tell you about rising oil prices not impacting real (inflation-adjusted) growth. For markets, it’s all about time, price, and expectations.

The Trick is to keep moving out there – across countries, currencies, commodities, etc. – and keep risk managing your gross and net positioning to account for multiple durations across multiple factors.

I’m not saying I see everything early. I’m saying quite the opposite really – I really have no idea what I am going to say about a market’s risk parameters until I write everything down in my notebook in the morning.

My immediate-term support and resistance ranges for the Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1, $120.57-123.64, $79.03-79.51, and 1.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

The Trick - Chart of the Day

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