This note was originally published at 8am on October 10, 2012 for Hedgeye subscribers.
“Keep it simple. Tell the truth. People can smell the truth.”
If you’re looking for Steve Jobs like thought leadership, product innovation, and job creation in this country, look no further than Steve Wynn. The guy gets what most of us who have built something from nothing get – he has vision.
If you and your spouse and/or business partners are really going to build something on your own in this good life, you have to, deep down in your bones, believe that people will side with the truth.
If what you deliver is better than what they currently use, both you and your customers win. If you believe that people are dumb – and that they’re generally not smart enough to Smell The Truth, you’ve already lost. Politics might be a better career path.
Back to the Global Macro Grind…
Whatever central planners want to throw at us this morning, I say bring it. The only certainty I have in my life is that the sun will rise in the East and, God willing, I will be sitting right here at my post, preparing to play the game that’s in front of me.
Yesterday, we got long again. We bought Apple (AAPL), Michael Kors (KORS), and Taiwan (EWT). We started the day with 7 LONGS, 8 SHORTS and closed the day with 11 LONGS and 3 SHORTS. Progress embraces change. So that’s what we do.
I’m not saying that our Top 3 Global Macro Themes for Q4 2012 have changed this morning. In fact, I’ll reiterate Theme #1 this morning (#EarningsSlowing) as that remains the market’s most important risk. That risk, however, gets overbought and oversold, fast.
The most important driver of the market’s daily beta isn’t AAPL. It’s the US Dollar. If you get that right, you tend to get a lot of other things right. Here’s the refreshed immediate-term TRADE correlation between the US Dollar Index and stocks:
- SP500 = -0.95
- EuroStoxx600 = -0.97
- MSCI World Index = -0.97
Those are wicked high correlations. So, you can either run around like a chicken with his 50-day Moving Monkey cut off on AAPL… or, you can just build a model that probability-weights where the US Dollar is immediate-term TRADE oversold/overbought, and then buy/sell AAPL (or whatever it is that you really like in the US or Global Stock market) using those signals as your headlights.
At the house of Marcus Goldman (when it was private and Partner Capital was on the line every day), they used to evaluate talent by asking themselves if their players could make money if locked in a “dark room” (by themselves) with only their process.
While they may have not put it that way precisely, I just did. Because I think that’s a great way to think about risk management and what it is, precisely, that you do. When everything goes straight down like it did yesterday, what do you smell? Buy or sell?
As a risk management process, smelling buy/sell opportunities should go both ways. That’s why I have had no problem changing my mind in the last 4 weeks. This isn’t politics – in real life business, flip-flopping your opinion is critical to success.
In the immediate-term, in particular for the beta implied in US stocks, there are always positives and negatives to consider.
- USD immediate-term TRADE overbought at $80.16
- EUR/USD immediate-term TRADE oversold at $1.28
- SP500 Immediate-term TRADE oversold at 1434
- VIX immediate-term TRADE overbought at 16.74
- UST 10yr yield holding 1.64% support
- II Bull/Bear Survey compresses by 1,000 basis points to the bear side
- Equity Volume is as dead as a doornail, nowhere to be found on last week’s bounce
- Tech (the market leader up until 3 weeks ago) is leading the decline
- S&P Sector Studies just saw 4 of 9 Sectors snap immediate-term TRADE support (XLK, XLI, XLY, XLB)
- KOSPI (South Korea) broke its immediate-term TRADE line again overnight
- Oil (Brent) is back above its TAIL risk line of $112.69/barrel
- Bernanke and Geithner are still gainfully employed
But, like any risk manager of any professional game, you have to make a call at some point on which way to lean. That’s why I have built a model that removes most of the emotion that I used to have when making those decisions. An emotional Mucker fights too much.
I don’t want to fight you. I want to help you. I don’t always lean, but when I do, I go with the process that most often tells me the truth.
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, AAPL, and the SP500 are now $1761-1792, $112.69-115.01, $79.69-80.16, $1.28-1.30, 1.64-1.76%, $630-642, and 1434-1464, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer