Play Tomorrow

This note was originally published at 8am on June 19, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“First rule is to be able to play tomorrow.”

-Warren Buffett

That’s what Warren Buffett said on May 5th at the Berkshire Hathaway 2012 Annual Meeting. While you don’t hear him focus the marketing message on risk management like he used to, it was nice to hear him highlight a version of his longstanding Rule #1 of investing – “Don’t lose money.”

The preface to his comment was addressing how early he was telling you to buy stocks during the thralls of 2008. “In October 2008, I wrote that article, should have been a few months later, but stocks were cheap.”

 

Not to keep score, but it wasn’t until 6 months later that “cheap” stocks got a lot cheaper. I’m not Buffett. I am just a small town Canadian who has never received a bailout dollar and would rather retire before accepting one. I went to 96% Cash in Q3 of 2008 and 91% cash yesterday. I may not be the best player in this game, but I will Play Tomorrow.

Back to the Global Macro Grind

With the SP500 recovering from its early session lows yesterday, US Equity Volatility (VIX) dropped -13.2% on the day and the US stock market moved to a 3 week closing high.

Was it a bird, a plane – or another iQe4 upgrade rumor? Could it be Geithner, Bernanke, or Obama? Sadly, being able to Play Tomorrow also requires an acute sense of hearing. Can you hear the bailout whispers now?

No one ever went broke booking gains, so instead of joining the circus, that’s what I’ll continue to do across asset classes on up-moves to lower highs. I’m not getting wacky net short. I’m just getting out.

After yesterday’s sales of the US Dollar, German Bunds, US Treasuries, Cattle, and Pigs (the COW ETF), here’s where the Hedgeye Asset Allocation Model stands for this morning’s US open:

  1. Cash = 91% (up from 61% yesterday)
  2. US Equities 9% (all Consumer Staples – XLP)
  3. International Equities = 0%
  4. Fixed Income = 0%
  5. Commodities = 0%
  6. International Currencies = 0%

Why sell everything other than US Equities (I might sell those this morning too)?

That’s simple:

A)     I have absolutely no idea what Bernanke (Fed) and Geithner (Treasury/IMF) are going to do next

B)      If you gave me the whisper (inside information), I wouldn’t know what the market’s reaction would be to it either

That, in a nutshell, is also why I’m going to stop hiring for the next couple of months.

You see, I not only run my mouth, but I run my own business. I backstop the company’s credit line. I know what meeting a payroll meant during the thralls of 2008, and I’m not going to be the greater fool rolling the bones on my firm and family’s future for the sake of other people’s short-term political pressures now.

But that’s just me.

I know there are many more important people in many higher places in this country that need to get paid. I’m not the only person who gets that. So have at it boys, centrally plan away.

President Obama is no one’s fool. His economic advisors have reminded him that if he gets the short-term moves in the stock market right, he’ll get the election right. In this morning’s Hedgeye Election Indicator (Chart of The Day), you can see that:

  1. Obama’s odds of re-election bounced by +200bps week-over-week to 56.1%
  2. Obama’s odds of re-election are now at their highest level in nearly a month
  3. Obama’s odds of re-election are still down, hard, from their peak (March 26th) of 62.3%

Now what?

Obama gets this. If he has his boys continue to debauch the US Dollar in the short-term, both commodities and stocks will like that. The People will have to take that in the pump, but that doesn’t really matter – because Bernanke says that’s “transient.”

Something else (that was not so funny) also happened on the way to the US Political Forum on March 26th. Both the Russell2000 (broad measure of US stocks) put in its YTD high and the US Equity Volatility Index (VIX) put in its YTD low.

Which begs the question– why am I not at 96% Cash again?

At 18.22 the VIX is immediate-term TRADE oversold at another higher-low. At 1344 and 772, the SP500 and Russell2000 aren’t yet immediate-term TRADE overbought. But they will be today. Both are also making lower long-term highs (on no-volume).

No Trust; No Volume. So we’ll see what this morning brings. Either way, and no matter what they throw at us next, we will be positioned to Play Tomorrow.

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, and the SP500 are now $1617-1640, $95.07-98.26, 81.59-82.16, $1.24-1.26, and 1324-1348, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Play Tomorrow - Chart of the Day

Play Tomorrow - Virtual Portfolio