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Being Wrong

This note was originally published at 8am on March 14, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“No amount of experimentation can ever prove me right; a single experiment can prove me wrong.”

-Albert Einstein

 

If your portfolio is 50% long SPY and 50% long AAPL, you are all set – Bonds, Gold, Currencies are all getting crushed. So much for Global Macro diversification.

 

In terms of US Equities, I’m sure most people absolutely nailed it yesterday, but I didn’t. I’d already sold my Long Financials (XLF) position (Sector Rotation into Utilities) and I wasn’t long anything big beta Basic Materials or Energy yesterday.

 

For those keeping score since February, not being long anything Commodities or International Currencies has actually been a very good risk management decision. Not to call out crashing currencies, but the Japanese Yen is down -9.1% since February 1st. Small Caps (Russell 2000) are dead flat from that same date.

 

Back to the Global Macro Grind

 

Since no one who made money in 2011 was long the Financials (XLF) and now, less than 3 months later, everyone I see on TV proclaims to be long them, what are we to do with this Storytelling about a “successful stress test” by the US Federal Reserve?

 

Well, my Being Wrong about the US stock market yesterday is one thing, but being wrong about what this test was all about is not what we do. Check out the parameters of this so called “test”:

  1. US GDP Growth: “stress” was measured using a down -8% GDP scenario
  2. US Unemployment: 13% was the bogey there (after Bernanke is celebrating his contributions to full employment)
  3. US Stock Market (not clear why this is such a critical part of Bernanke’s test) = Dow 5,500

Not a typo. Not Dow 15,000. Dow 5,500. Good thing most of these revolutionary banking outfits passed the test!

 

If I had the insider information that some apparently traded in front of on the pre-release of the “stress test” (someone bought a boat load of Citigroup $38 puts, right before they “failed” the “test”), I wouldn’t have changed my positioning ahead of it anyway. That’s illegal, last I checked.

 

I don’t know what level of experimentation my risk management models could have been stress tested with for me to have not made the risk adjusted decisions I’ve made throughout March either.

 

To put yesterday’s Global Macro move in context, it was a 3.7 standard deviation event across asset classes. Since I have scored/back-tested my model (2007), this has happened less than 1% of the time. Evidently, the 1% in this country still matters.

 

Moreover, what I learned the hard way yesterday was that “a single experiment can prove me wrong.” I cannot understate the 3 dimensional risk associated with US interest rates rising from the ZERO bound. This baby is all on Bernanke’s lap too – don’t forget that he’s the one who has trained us, like Pavlovian dogs, to carry trade 3D Risk:

  1. Daring us to chase yield (got dividends?)
  2. Delaying Balance Sheet restructuring (bad sovereign deficit spending, including the USA)
  3. Disguising Financial Market Risk

Again, if you are long the 50/50 AAPL/SPY portfolio, no worries about this. But, in the rare case that you are long Gold, Bonds, or Currencies, this Disguise of Financial Market Risk doesn’t need to be explained to you. This morning, it’s in your account.

 

For March 2012 to-date:

  1. GOLD = -3.1% (down -7% from its FEB 2012 peak)
  2. TREASURIES = 2 and 10-year UST Bond yields are up +24% and +13%, respectively (bonds smoked)
  3. CURRENCIES = the 2 majors vs the USD (Yen and Euro) are down -3.7% and -1.8%, respectively

So what do I do from here?

 

My risk management process doesn’t chase stock prices on no volume and bombed out volatility signals – so don’t expect me to change my process after Being Wrong on that asset class for a few days. It was only last Tuesday when I was getting long at 1345.

 

Across durations, here’s what my core 3-factor risk management ranges (PRICE, VOLUME, VOLATILITY) are telling me to do:

 

1.   PRICE: immediate-term risk range = 1367-1397, so we are immediate-term TRADE overbought or I wouldn’t have shorted SPY yesterday at 3:08PM into the close. Long-term, lower-highs (down -10.9% versus all-time high) are obvious – so is intermediate-term TREND support at 1290.

 

2.   VOLUME: flat out nasty volume signals, across durations, will only be considered irrelevant by people who have blown up in any of the massive Q1 to Q3 US Equity draw-downs of 2008, 2010, and 2011. Long-term volume signals are at generational lows, while yesterday’s immediate-term volume was only the AVERAGE volume of the 30-day composite in my model.

 

3.   VOLATILITY: Yesterday’s Chart of the Day showed you how, like clockwork, this 14-15 Equity Volatility (VIX) zone has been as clear a signal to sell long Equity and Commodity exposure as the sun rising in the East. Snapshot VIX: up +9% in 30mins yesterday to 15.89 before the almighty “stress test” leaked, then straight back down to close at 14.80. Fast.

 

Being Wrong doesn’t make me happy. I have no excuse for it – neither am I searching for one. As Billy Beane said in Moneyball, “I hate losing more than I do winning.” Today, I’ll wait and watch. Being forced to move is no way to win.

 

My immediate-term support and resistance levels for Gold, Oil (WTIC), US Dollar Index, and the SP500 are now $1663-1698, $124.21-127.41, $79.59-80.49, and 1367-1397, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Being Wrong - 1. Bern

 

Being Wrong - 11. VP 3 14



Bernanke's War

“The Fed has effectively declared currency war on the world.”

-James Rickards

 

If his Policy To Inflate persists any longer, Ben Shalom Bernanke is likely to go down in history as America’s last completely politicized head of the US Federal Reserve. When compared to Alan Greenspan, that’s saying something.

 

During QE1 and then, to a lesser extent, during QE2, I’d have been in the minority making a statement like that. Today, as he sheepishly pushes for QE3, 4, and 5, I have plenty of company.

 

In Currency Wars , Rickards ends the introduction of his book by suggesting that “in the end the reader will understand why the new currency war is the most meaningful struggle in the world today – the one struggle that determines the outcome of all others.”

 

The glaringly obvious part of this new American reality is that, deep down, the Fed Chairman is very insecure about this. Why else would the man be engaging in a personal PR War with Twitter and appearing with Diane Sawyer on ABC?

 

At George Washington University yesterday, the vaunted historian of an era that didn’t have the internet, a globally interconnected Asian economy, or Apple, continued to proclaim his mystery of faith:

 

“We did stop the meltdown… we avoided what would have been, I think, a collapse.”

 

Great. Just great. Thanks for saving us from challenging your academic textbook, Ben. Now what about today? What about Burning The Buck back towards 40-year lows  and ripping us a new one with these gas prices 3 years later?

 

Back to the Global Macro Grind

 

I’ve fought the Fed before, and won. If no one else wants to strap it on and do this, I’ll officially wear the C and stand on the front lines of this war. If the last 3 weeks of Down Dollar is the best you have Bernanke, game on.

 

Don’t fight the Fed.” Yep. Got it. That and Madoff’s returns are about as believable as the Hunger Games. On our Q2 Macro Themes call in early April we’ll show you a full slide deck of what fighting the Fed at intermediate-term market turns has saved you:

 

1.   Q1 of 2008 – when the entire construct of Old Wall Street was begging Bernanke for “shock and awe” interest rates cuts (remember that?), he delivered his constituency the goods by cutting to 0% (but had to scare the hell out of The People to do it).  Easy money then delivered the world’s consumers $150 oil, and one heck of a Consumption Crash.

 

2.   Q1 of 2011 – after QE1 stocked commodity inflation … and more of that (QE2) perpetuated a huge slow-down in real (inflation adjusted) consumption growth (Q1 2011 US GDP 0.36%), fighting the Fed in Q1 of last year was one of the best Global Macro calls, ever. From Q1 of 2011 to the lows of October, Asia, Europe, US Small Caps, Commodities crashed.

 

3.   Q1 of 2012 – if you’re selling the hope of Growth’s Slope (slowing), you are in the middle of fighting Bernanke’s War right now.

 

From America’s perspective, it’s a war on savers and consumers. It’s a war on our Constitution. It’s a war against objectivity, flexibility, and gravity. And, most importantly, it’s a war against Free Market Capitalism.

 

From the rest of the world’s perspective, let me start with 1 very simple fact – we are talking about the World’s Reserve Currency. That is a privilege, not a political weapon to be abused by an un-elected bureaucrat. That’s what China, India, and Japan have to deal with when they import oil. Food and Energy is what the world actually consumes. And commodities are largely priced in US Dollars.

 

That’s why every time Bernanke Debauches The Dollar, Global Growth Slows. I don’t know how much more evidence you need of this simple fact – COMMODITY INFLATION SLOWS GROWTH!

 

Look around you. Away from Apple going up, this is what’s going on in the world this morning:

  1. Asian and European stocks are falling (China and India stopped going up in FEB; Spain is getting smoked, etc.)
  2. Pro-cyclical Stocks and Commodities (Energy stocks, Copper, etc.) are mapping Asian stock market declines
  3. Treasury Bond Yields are falling, again (10-year yield is down -8% in a straight line to 2.20%)

As David Einhorn reminds us, on Wall Street fooling some of the people some of the time happens. But you can’t fool all of the world’s people, all of the time, that rising commodity prices have nothing to do with the world’s currency price in which they are sold. The #1 story on Reuters this morning: “Americans Angry With Obama Over Gas Prices” – they should be angry with Bernanke.

 

Sorry David Axelrod, you’re not going to solve the world’s anger by “tapping the SPR.” The most obvious way to get oil prices down is by the Fed raising interest rates. Don’t buy that? Or your inflated stock and commodity portfolio can’t afford that? I dare you to buy Oil and/or Gold Futures after you get the inside looksy that Bernanke is going to raise rates on a Sunday night on 60 Minutes.

 

If you can’t tell, I’ve had it with these conflicted central planners. Politicians in Washington and the halls of Western Academic Dogma that advise their career risk on economic matters can tell stories to students and whoever in the media is gullible enough at this point to believe them – but that will not end this war.

 

Bernanke’s War is on. And the rest of the world is watching.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Spain’s IBEX, and the SP500 are now $1, $122.41-124.67, $78.83-79.37, $82.67-84.12, 8101-8395, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bernanke's War - Chart of the Day

 

Bernanke's War - Virtual Portfolio


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