This note was originally published at 8am on March 13, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Resist the crowd: cherish numbers only.”
-Jeremy Grantham
Doesn’t that sound hard core? We all aspire to know all of the numbers. We all want to sell every top, and buy every bottom. This is easy, right?
Whether I’m looking at rising US Equity futures this morning or whether I was looking at them in either March of 2008 or 2011, it’s the same old grind. In the last 4 years, literally every time US Stock Market Volatility (VIX) has tested the 14-15 zone, you’ve been paid to Resist The Crowd.
This time, despite the lowest trading volumes in US stock market history – oh, and the highest monthly US government deficit in US history (FEB = -$237.7B US Deficit) – is going to be different. Right?
Back to the Global Macro Grind…
Flying back from California last week, I had the opportunity to crush my reading pile. Long-time readers of my rants know that from a process perspective, I just love digging into my pile.
Here are the 3 market views that jumped out of the required reading:
- “Your Grandchildren Have No Value” - Grantham’s Quarterly Letter
- “Defense” – Bill Gross Monthly
- “S&P 1,700” – Birinyi Associates
Addressing these in the reverse order that they appear (not suggesting causality), the big round number from Laszlo Birinyi was backed up by the least impressive risk management process. If I recall his market views correctly from right around this time last year (pre 30% crashes in everything small cap, cyclicals, and commodities), they haven’t really changed.
After seeing his newly minted academic CEO, Mohamed El-Erian, get roughed up by Doubleline’s lynx-eyed Jeff Gundlach last year, Bill Gross’ title explains exactly how he feels after calling for US Credit Risk and a melt-down in US Treasuries (again, right around this time last year) – he’s playing defense. The most obvious defense for PIMCO is probably firing Mohamed.
Finally, back to Grantham, his longest Quarterly Letter ever was highlighted by the following 3 risk management thoughts:
- “Recognize your advantages over the professionals… the individual is far better positioned to wait patiently…”
- “Try to contain natural optimism… not easy, but easier…”
- “We can agree that in real life, as opposed to theoretical life… the enthusiasm of the crowd is hard to resist.”
Accuse me of having a confirmation bias towards Grantham – I’ll take that as a compliment. Like me, he’s had his own performance issues in this game. Unlike most, he’s self effacing in addressing our innate weaknesses as human beings. Markets humble the “smart.”
I personally do not think that calling for big round numbers and “year-end targets” in major indices requires any risk management process whatsoever. Neither does writing Op-Eds to support theoretical views that have no actual precedent.
The only thing I am certain of in this business is that the more I know about what it is that my competition thinks they know, the less I know about what is going to happen next.
Embrace Uncertainty.
Can Global Equities go a lot higher? Evidently yes. After that, can they go a lot lower (May-Aug of 2008, 2010, 2011)? Evidently yes.
So what do you do now? For me, the answer is always changing:
- Last Tuesday at 1129AM EST with the SP500 30 points lower, I was buying
- This Tuesday at some point in/around 10AM EST, I’ll probably be selling
That definitely doesn’t mean I nailed it. It just means that in the immediate-term, I am proactively managing the risk of the price range as both volume and volatility signals instruct me to front-run people staring at single factor-model moving averages.
Why “cherish the numbers” in our Global Macro Research (Growth, Inflation, Policy) model? Because over the intermediate to long-term (2007-2012), Resisting The Crowd’s career risk management decisions to ignore those numbers has worked.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, US Equity Volatility (VIX), and the SP500 are now $1691-1711, $123.87-126.79, $79.34-80.24, 15.23-17.98, and 1363-1382, respectively.
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
