Proactively Prepared

This note was originally published at 8am on May 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Most people have the will to win, few have the will to prepare to win.”

-Bobby Knight

We don’t have to apologize, fear-monger, or point fingers while everyone is reacting to the news again this morning. This has been going on for 5 years. Get both the Slope of Global Growth (slowing) and the direction of the US Dollar right, and you’ll get a lot of other things right.

Winning in this country (or being right in this business) should be celebrated instead of shunned. It’s not easy out there – and it’s not going to get any easier any time soon. Life is hard.

Repeatable risk management processes trump pundits. Either our profession’s broken sources go away, or whatever is left of the trust, inflows, and volumes in our markets will.

Back to the Global Macro Grind

From a Global Macro perspective (currencies, countries, commodities, etc.) I am finally seeing the early signs of capitulation (immediate-term TRADE oversold) on the downside as the US Dollar approaches immediate-term TRADE overbought.

That’s what happens when The Correlation Risk goes “on.” Policy (or in this case the lack thereof in expectations of an iQe4 upgrade) drives the US Dollar; and the US Dollar drives mostly everything else (USD up for the 11th consecutive day today).

Correlation Risk has a reflexive impact on demand (markets that go straight down scare people), but it is not traditional demand in terms of how we measure it – it’s behavioral. Our Leading Indicators on Global Demand (Growth) have been slowing since February-March.

Commodities and Asian Equities stopped going up in February; most other major Global Equity markets stopped going up throughout March; and US Treasury bond yields stopped going up in March as well.

In other words, if you have a Globally Interconnected Risk Management Process (or just a Twitter feed with credible sources), why people are freaking out right now (instead of when they should have), should at least give you a chuckle.

People freak-out (buy high, sell low) because we have institutionalized asset management into a very short-term game of performance chasing. Sadly, gaming the game of the next policy move is paramount on people’s minds – and the intermediate-term draw-downs (from peak-to-trough) for the last 5 years have been epic.

Here’s how the draw-downs (losses of your capital from the YTD tops) look in some of the majors:

  1. Japanese stocks (Nikkei) = down -14.2%
  2. Hong Kong stocks (Hang Seng) = down -11.2%
  3. Indian stocks (Sensex) = down -13.0%
  4. German stocks (DAX) = down -11.3%
  5. Spanish stocks (IBEX) = down -25.1% (crashing)
  6. Russian stocks (RTSI) = down -22.3% (crashing)
  7. CRB Commodities Index = down -11.3%
  8. Gold = down -14.2%
  9. Oil = down -11.8%
  10. Treasury Yields (US 10yr) = down -24.8%

Bullish, right?

Right, right. And all of this, including JPM’s news is all about Greece, right?

C’mon. Let’s get real here before whatever is left of the world’s investors yank all their capital from our fee based businesses. Ben Bernanke may very well have dared you to chase yield on January 25th, but that doesn’t mean you should have taken on the dare. You have seen this Qe expectations game before. You should have sold into it.

US Equities, which I didn’t list in the top 10 draw-downs, have done a complete round trip from where we were banging the risk management drums here in New Haven. While the Russell2000’s draw-down is about the same as the Hang Sang’s (-8.2%), the SP500’s is just -6.3%. So, if you bought the April 2ndtop, you only have to be up about 7% (from here) to get back to break-even.

Break-even? Yes. That matters. And so does timing – that’s why we are so focused on both.

Check out the timing of this trifecta:

  1. Russell 2000 peaks on March 26that 846
  2. US Equity Volatility (VIX) bottoms on March 26that 14.26
  3. Obama’s probability of winning the US Election peaks on – yep, March 26th

Political pundits probably don’t read this Newsletter. But if they did, they’d think that last point can’t be true. After all,  it doesn’t come from Washington or the accepted wisdoms of partisan paralysis.

We call it objective analysis. That’s all the Hedgeye Election Indicator is, math.

So, as US Equity markets draw-down from their March/April peaks (as they have from Q1 to Q3 in every year of the last 5 other than in 2009 when we were the most bullish firm on Wall Street 2.0), that’s obviously going to be a headwind for Obama.

It’s also going to be a headwind for Ben Bernanke.

Don’t forget that any headwind for Obama is, on the margin, a tailwind for Romney. Anything compression in the spread between Obama versus Romney (Obama had a huge lead in March), puts Bernanke’s career risk in play.

That, dear friends of the risk management gridiron, is US Dollar bullish.

And, with the US Dollar Index breaking out across all 3 of our core risk management durations (TRADE, TREND, and TAIL), you want to continue to be Proactively Prepared for what may very well be the most epic economic debate of our generation.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1531-1598, $110.27-112.99, $80.04-81.22, $1.27-1.29, 1324-1358, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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