This note was originally published at 8am on August 21, 2012 for Hedgeye subscribers.
“Golf is a game in which one endeavors to control a ball with implements ill adapted for the purpose.”
Yesterday I took a few of my colleagues out to play in a charity golf tournament at The Course at Yale. For those of you who haven’t played it, the Yale course is not for the faint of heart. It has some incredibly challenging holes replete with hazards in the most untoward places. The more we became engrossed in golf yesterday, and marginally removed from stock market operating, the more I actually began to see the parallels between the two.
Now as anyone will tell you, I am far from a great golfer. But just as a broken clock tells time twice a day, every round I pull a few shots out of thin air that make me look like a veritable Arnold Palmer, albeit a younger and more Canadian version. In between my great shots, of course, were many less than spectacular shots. The bad shots, though, made me think more strategically about the game and I realized that if I could stay out of trouble – avoid the sand traps, out of bounds, and water hazards – I could still score reasonably well.
In short, the key parallel between golf and investment management: avoid the looming hazards and you will remain competitive. The caveat to this point is that in golf there are hazards that are not so obvious to the casual observer. The wild card hazard yesterday on the course was my colleague, and Hedgeye’s Asia Analyst, Darius Dale.
Darius is a novice golfer but was a lineman in college and still has the strength of a few normal men. Needless to say, when he winds up on the tee, it’s best to hide behind your cart if you are within a few fairways. Being the risk manager he is, Darius is not afraid to yell - fore! Collectively, we appreciated this risk management aspect of his golf game.
Speaking of avoiding hazards, the rumors coming out of Europe this morning imply that the Europeans hope to avoid any future sovereign debt sand traps. This morning the Telegraph is reporting that Jorg Asmussen, Germany’s director at the ECB, is supporting unlimited purchases of peripheral debt. This plan is in line with Draghi’s plan, though is in conflict with the German Bundesbank. This article also re-stated the report from Der Spiegel on the weekend that suggested the ECB was studying plans to cap Spanish and Italian yields. (It seems both Greece and Portugal have been all but forgotten!)
Purportedly, the key criteria to trigger this plan is a formal request from Spain for a bailout from the EFSF/ESM and agreeing to the fiscal terms therein. On a positive note, the market appears to be of the view that Spain will get onside as the Spanish bond auction yesterday was seemingly successful. Specifically, Spain sold its maximum target of €4.51 billion of 12-18 month bills this morning. The 12-month average yield was 3.070% versus 3.918% on July 17th, 18-month average yield 3.335% versus 4.242% on July 17th. Further, the bid-to-cover was a veritably euphoric 2.4x.
In the Chart of the Day today we show Spanish 10-year yields going back one year. The Spanish 10-year has backed off of its highs, so it seems that the rumors the ECB may change the lay of the course and bring out some bigger clubs (The Bazooka Driver?), which have had at least a marginally positive impact on Europe’s debt woes. The history of the last couple of years has indicated that any proposed solution in Europe has typically been short term in nature and never quite as good as the rumors in Der Spiegel. Of course, perhaps this time is truly different . . .
Switching clubs briefly, our Energy Analyst Kevin Kaiser recently did an update on the key factors he sees as supporting the price of oil and wrote the following:
“The fundamentals (read: supply and demand) warrant lower oil prices, but expectations for easier monetary policy and fears of supply disruptions (geopolitical risk) have lifted prices recently. Note that the oil market has shrugged off actual data in favor of events that may or may not occur – the Fed has not gone to QE3, Europe has yet to implement a comprehensive solution to its debt crisis (if there is one), and there has been little aside from increased rhetoric out of Iran and Israel – yet oil continues to trade higher in expectation of some or all of those events.”
On the last point, it seems the rhetoric is at the very least heightening, especially according to reports from The Times of Israel this morning. Well it is quite possible this is saber rattling by the Israeli government, the report was very specific and as such we wanted to highlight it below (emphasis ours):
“Israel’s Prime Minister Benjamin Netanyahu “is determined to attack Iran before the US elections,” Israel’s Channel 10 News claimed on Monday night, and Israel is now “closer than ever” to a strike designed to thwart Iran’s nuclear drive.
The TV station’s military reporter Alon Ben-David, who earlier this year was given extensive access to the Israel Air Force as it trained for a possible attack, reported that, since upgraded sanctions against Iran have failed to force a suspension of the Iranian nuclear program in the past two months, “from the prime minister’s point of view, the time for action is getting ever closer.”
Asked by the news anchor in the Hebrew-language TV report how close Israel now was to “a decision and perhaps an attack,” Ben-David said: “It appears that we are closer than ever.”
Obviously, the Israel government makes statements to the media for strategic reasons and much of this could well be rhetorical. That said, one thing I’m pretty sure of is that at a VIX of 14.02, the tail risk of an Israeli strike on Iran is not even remotely priced into the U.S. equity markets. To some, my emphasis on the article above may be construed as fear-mongering, but in reality it is just like golf – you need to be aware of the hazards on the course.
Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are now $1614-1628, $113.21-115.49, $82.21-82.81, $1.22-1.24, 1.74-1.88%, and 1408-1419, respectively.
Keep your eye on the ball,
Daryl G. Jones
Director of Research