“The world is not the way they tell you it is.”
That’s the opening sentence to one of my favorite books about markets, The Money Game, by George Goodman. He wrote it in 1967 under the pseudonym ‘Adam Smith.’ That was a metaphor for the anonymity of the game itself. It helped him tell it like it is.
When you call what it is that we do a “game”, most people feel something about that. Some people love it – some loathe it. But that doesn’t change the fact that, for me at least, this is the most competitive arena away from professional sport that I can find.
“The irony is that this is a money game and money is the way we keep score. But the real object of The Game is not money, it is the playing of The Game itself. For the true players, you could take all the trophies away and substitute plastic beads or whale’s teeth; as long as there is a way to keep score, they will play.” (page 21)
Back to the Global Macro Grind…
For those of us keeping score since Growth Slowing became obvious, globally in March, the game has largely been won by those who moved a significant amount of their asset allocation to Cash.
As a reminder, our Top 3 Global Macro Themes for Q2 2012 have been:
- Fed Fighting: The Last War (Growth Slowing)
- Bernanke’s Bubbles (Commodities)
- Asymmetric Risks (long US Dollar)
When you have Growth Slowing and Deflating The Inflation of Bernanke’s Bubbles (Commodities), at the same time, you get draw-downs in everything big beta (cyclical commodities, emerging market stocks, European bonds, etc.). You also see a “flight to quality” (i.e. low beta) like US Dollars, German Bunds, and US Treasuries.
Playing the game this way is not new. If you made this beta down-shift move at the end of Q1 in 2008, 2010, 2011, you won. At every Q1 turn, the Old Wall has been as dependable as the sun rising in the East in A) not taking down their GDP Growth estimates when markets implied they should and/or B) understanding the Correlation Risk associated with a Dollar up move.
So, while it’s fun to say “consensus is bearish”, it’s more fun when you say that at 1295. Winning is always more fun.
From a fundamental research perspective, consensus is not yet Bearish Enough on Growth. By the end of Q2 it might be. Market expectations change every day, so stay tuned. On that score, in the USA we’ll get 3 Big Hedgeye Mac-ro catalysts this week:
- Q1 2012 US GDP (to be revised well below Old Wall consensus that was running at 2.5-3% only 3 months ago)
- PMI and ISM readings for the month of May (expectations are high in the mid-50’s for both prints)
- US Employment Report (expectations are still relatively high for a 150,000 plus print on payroll adds)
From a quantitative risk management perspective in US Equities, here’s what I am looking for to register another buy/cover signal:
- VIX re-test of the 24-25 zone
- SP500 re-test of the 1 zone
- The II Bull/Bear Spread to narrow to +600bps wide or less (this morning it widened to the Bull side, back to +1500 bps wide as only 24% of those surveyed admit to being bearish – that’s called career risk management after an up week)
Volume is another critical quantitative factor to consider relative to the games we’ve played coming out of Q1 2008, 2010, and 2011. The 2012 game has no volume on the rallies (most of those other years had volume).
Yesterday’s +1.1% up move in the SP500 to a lower-high (down -6.1% from the 1419 SP500 YTD peak) clocked a volume reading that was -26% below the average down day volume for the month of May alone.
Yes, that’s bad. So are the “flows.”
The flows are always key to the game. Sometimes I think they can be as important as any behavioral or quantitative risk management signal I can give you.
The flows (as in your money) are either flowing in or out of the market in real-time. Currently, in both commodities and equities, we have outflows, globally.
That’s where the run of the mill 2007-2012 Perma-Bulls get right whipped around buying high. They still think this is the 1990’s or the 2004-2007 period where money was easy (Greenspan and Bernanke) and the flows where rushin’ in.
The flows are like the fans of The Game. You can have the best game of your life, but if no one is watching, buying popcorn, and planning on coming back to the next game, who cares?
That’s why I have been so focused on the leadership principles of Transparency, Accountability, and Trust ever since I put on a Hedgeye jersey in 2008. I believe in the deepest part of my being that if we don’t, as a profession, get our free-market principles back – we’re not getting The People’s trust back.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $104.62-108.08, $81.87-82.91, $1.24-1.26, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer