This note was originally published at 8am on May 21, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“A different world cannot be built by indifferent people.”
-Jack’s fortune cookie
My son Jack was born right around the same time that I came up with this crazy idea to start Hedgeye. I love them both dearly.
Last night was the typical Sunday night at the McCullough dinner table. Our kids were exhausted from spending a beautiful day outside, but fired up enough to pound back a few more fortune cookies.
By the time I made my last cover/buy move late on Friday afternoon, that’s pretty much how I felt too.
Back to the Global Macro Grind…
As my son grows up, he’ll be taught that it’s always better to be early in life than late. If he ever gets into this business, we’re going to have to work on how early though. Being too early, for too long, is also called being wrong.
In buying US Equities, I’m at least a few days early. That’s definitely better than being a few months late in selling them. The last 2 months have been flat out nasty. The highest conviction position you should have had was Cash.
We peaked at 91% Cash. That’s 5% lower than where we went in Q3 of 2008. This morning’s Cash position in the Hedgeye Asset Allocation Model is 61% (down from 85% at the start of last week).
Here’s how our asset allocation looks this morning:
- Cash = 61%
- US Equities = 27% (SP500, Consumer Discretionary, Healthcare, and Apple – SPY, XLY, XLV, and AAPL)
- Int’l Equities = 12% (China and Brazil – CAF and EWZ)
- Int’l Currencies = 0%
- Fixed Income = 0%
- Commodities = 0%
Not being long anything in Commodities wasn’t something Jack came up with at dinner last night. It’s been part of our Q2 Global Macro Themes calls that include Fed Fighting and Bernanke’s Bubbles (email Sales@hedgeye.com if you’d like an updated slide deck with our refreshed risk management levels – all of the long-term bubble charts are in there, most of them Commodities).
Buying Brazilian Equities early was my biggest mistake on the long-side (buying anything Global Equities other than Chinese Equities has pretty much been a big mistake since the end of Q1). Of the major countries, China is the world’s top performer since April.
My long SPY (SP500) position is at 9% in the asset allocation model and that’s likely to have a short leash. If the SP500 doesn’t hold our long-term TAIL line of 1282 support, I won’t have a position in it at all. That’s when the crash (YTD peak to trough drop of 20% or more) risk comes into play. Being early by a few days is one thing – buying into a crash is not what we do.
With the SP500 down -4.3% last week, down -7.4% for the month-to-date, and down -8.7% from the YTD high, this is either the only obvious “buying opportunity” we’ve had since early January, or a not so friendly signal for the weeks and months ahead.
Growth Slowing and Deflating The Inflation – we get that. What we don’t get is how quickly these fundamental research factors get fully priced in. That’s why we reserve the unalienable right to change our mind any minute of the day.
If we get a lift today and/or tomorrow, we’re likely going to sell into it. That’s because A) we’re too long and B) the Macro Catalyst Calendar starts to get gnarly again starting on Wednesday:
- Wednesday = New Home Sales for April (expectations are high at 335,000 given the weather in Feb/Mar)
- Thursday = Durable Goods for April are “expected” to rise, sequentially, versus March – that’s not a given either
- Friday = University of Michigan Consumer Confidence (for May) is expected to hold fairly elevated gains at 77.8
Then you have the long weekend…
And then… you have Europe, a potential mess of a Q2 “earnings season”, and Volcker Rule implementation in July.
Don’t be indifferent. Keep moving out there. And keep a Fortune Cookie or two nearby if you need to feel better about America’s economic future. If we don’t evolve our policy making process soon, our kids are going to need all the help they can get.
My immediate-term support and resistance ranges Gold, Oil (WTIC), US Dollar Index, EUR/USD, 10-year Treasury Yield, and the SP500 are now $1575-1618, $90.57-94.42, $80.67-81.81, $1.26-1.28, 1.66-1.80%, and 1282-1335, respectively.
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer