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


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more