This note was originally published at 8am on March 07, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“He was a man of habits.”
Earlier this week I cited a book I am enjoying, “The Billionaire’s Vinegar.” Today’s quote summarizes the unique persona of Michael Broadbent. Becoming the world’s most prominent wine auctioneer didn’t just happen.
Neither does risk in these globally interconnected markets. There is no such thing as “risk on” and “risk off.” In real life, risk is always on. Risk never sleeps.
Habits in this business can be as polarizing as a legacy media channel’s partisanship. Fortunately, Old Habits on Wall Street and News Media 2.0 are dying on opacity’s vine.
Back to the Global Macro Grind…
I personally have a habit of selling on green and buying on red. Most of the time it saves me from grossly violating Rule #1 – Don’t Lose Money. Some of the time it doesn’t.
Buying too early is also called being wrong. The lynx-eyed Jeff Gundlach at Doubleline says “an investor is a trader who is under-water.” Great one liner – primarily because it royally annoys Captain Stock Picker. Especially after a day like yesterday.
Yesterday’s Short Covering Opportunity in everything that was immediate-term TRADE oversold was as obvious to me as the Short Selling Opportunities we were signaling 2.5% higher with the SP500 at its YTD highs last week.
On red, after a 3-day correction in Global Equities and Commodities, here’s what I’ve done in the Hedgeye Asset Allocation Model:
- Cash = 46% (down from 58% on Friday)
- Fixed Income = 24% (no change)
- US Equities = 18% (up from 12% on Friday)
- Commodities = 9% (sold Corn, bought Oil)
- International Equities = 3% (bought Canada)
- International FX = 0%
I’m not saying this positioning is right or wrong. The market will decide my fate on that. I’m just TimeStamping what I did. Repeatable Process is a habit too.
Getting longer here certainly has risks. In the Hedgeye Portfolio I went into yesterday’s open with 11 LONGS, 9 SHORTS. This morning I have 13 LONGS and 7 SHORTS. I’ll most likely tighten that up, selling some on green today.
Why sell on green? Isolating the USA, here are some of the risk management signals jumping off my notebook page today:
- SP500 broke immediate-term TRADE support of 1364 and now has a lower-high of resistance up at 1359
- Equity Volatility (VIX) broke out above immediate-term TRADE resistance of 17.72 yesterday; upside to 23.17
- US Equity Volumes continue to flash gnarly negative skew – accelerating volumes on the down days, not up ones
- S&P Sector Rotation call we made last week remains crystal clear (Utilities (XLU) best yesterday; Financials (XLF) the worst)
- S&P Sectors that have broken their immediate-term TRADE lines = 5 of 9 (XLB, XLI, XLF, XLV, and XLE)
- 10-year US Treasury Yields continue to signal Growth Slowing (trading below my TREND line of 2.03%)
- Yield Spread (10yr minus 2yr) is down 3bps week-over-week; benign but not bullish at 167bps wide
- US Dollar Index has moved back to bullish TRADE and TREND after Romney wins in Michigan and Ohio
That last point is probably the one that rings the political gong louder than any other. Why? Because people are partisan. But the math trumps partisanship and the fact of the matter is that the US Dollar Index is up +2.1% since Romney won in Michigan last week (see our newly minted Hedgeye Election Index). Causal? Correlated? Does it matter which?
Strong Dollar = Strong America. Period.
That’s the most bullish long-term (and sustainable) economic strategy I can paint for Americans right now. Sadly, it’s also the most unexpected. Old Habits, and the economists and politicians who get paid to pander to them, won’t agree with this because none of them have tried it in the last decade (i.e. so none of them can take credit for it when it works).
To get a stable and strong US Dollar will take both fiscal and monetary sacrifice. God forbid the stock market goes down for a few weeks to get there. But inflation expectations will go down too. Whether it was $20/barrel (average price of oil) between 1983-1989 or 1993-1999, these were the most bountiful decades or US job creation and economic prosperity, ever.
Ever is a long time. Old Habits of debauching your currency for short-term political votes should be held accountable to ever, too.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1658-1694, $120.83-123.89, $79.32-79.91, and 1336-1359, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer