This note was originally published at 8am on October 11, 2012 for Hedgeye subscribers.
“The American people do not think the system is fair, or on the level.”
Forget #BigBird. The world’s tweeters will shift to whose political chicken gets fried tonight in Danville, Kentucky. It’s a good thing there’s no bubble in partisan US politics.
In terms of political ironies, the aforementioned quote is a beauty. It’s how MSNBC’s Chris Hayes kicks off Chapter 3, “Moral Hazards”, in the most recent book I have been reviewing, “Twilight of The Elites.”
While I’d love to debate Hayes and/or my boy Biden on their respective concepts of “fairness”, here’s something Hayes wrote that I completely agree with: “ … we cannot have a just society that applies the principle of accountability to the powerless and the principle of forgiveness to the powerful. This is the America in which we currently reside” (page 102).
Back to the Global Macro Grind …
With the SP500 down for the 4th consecutive day, we got longer yesterday, for a trade. To be clear TRADEs (3 weeks or less) in our model are not to be confused with TRENDs (3 months or more). TRADEs get overbought and oversold. TRENDs (like #EarningsSlowing) last longer.
Some people don’t like the whole Duration Agnostic thing. Some people love it. I don’t wake-up every morning looking for love or loathing. I focus on doing what I can do to make our risk management process more dynamic and repeatable, across durations.
From an immediate-term TRADE perspective, at $630 AAPL was evidently oversold on Tuesday. What was oversold on Wednesday?
1. Tech (XLK) – First, understand that this S&P Sector ETF is 1/5 AAPL, so buying XLK yesterday gets me more of what I really want - in a slowing growth scenario, I want to buy the cheap growth that I can find.
2. Utilities (XLU) – If I am going to buy what’s getting smoked in October (Tech), I also want some asymmetry on the long side in owning something that works if Tech doesn’t. Utilities are one of the top performing S&P Sectors since The Bernanke Top.
3. Gold (GLD) – Hedgeye Playbook long, for a trade, here as the US Dollar Index moves to immediate-term TRADE overbought. Remember, get the US Dollar right, and you’ll get a lot of other things right.
Yes, one of our intermediate-term TREND Themes for Q4 is Bubble #3 (Commodities), but that doesn’t mean I can’t fully embrace understanding what people do with bubbles (they chase them when they are green), and trade the risk of the position both ways.
Gold’s long-term TAIL risk (3 years or less in duration) is much more daunting than its intermediate-term TREND risk. Why?
- TAIL risk = lower long-term highs from the $1900/oz zone (2011 all-time highs) make a bubble look like a bubble; look backwards
- TREND support = Gold has recently proven to test its YTD highs established in February ($1794); that keeps mo mo bulls in it
- TRADE range = $1758-1792; you don’t have to be bullish or bearish to understand that; it’s just math
Agreed. It’s a lot harder to keep countervailing thoughts, across durations, in your head than being perma – but that’s precisely why I think about risk that way. The market doesn’t care about your politics or your positioning.
So, if I sell Gold at $1792, it will probably be because it’s immediate-term TRADE overbought, the USD is immediate-term TRADE oversold, and Romney’s momentum in the polls keeps firing Bernanke in play (no Bernanke is not good for Gold).
Back to Tech…
I’m not a techie, but I have built a #WallSt2.0 firm that’s been able to monetize Twitter. So you can just call me social. Risk managing Tech (XLK) is not for the faint of heart, but where it closed yesterday illustrates the Duration Mismatch of price momentum quite well:
- Tech (XLK) = down -2.5% for the month of October is the worst performing Sector of the 9 in the S&P Sector Model we track
- Tech (XLK) = up +18.1% YTD is the 3rd best performing Sector in the S&P for 2012
- Tech (XLK) = has a heavy weight in AAPL (20.73% of the ETF) and AAPL is up +58.25% YTD
So, if you want to get Tech (XLK) right, you probably have to get AAPL right. That’s why timing and factoring your position risk matters.
Now some people pay a lot of attention to what is up for the YTD. I personally couldn’t care less. My net wealth (and most people who don’t measure it on Old Wall’s calendar bonus schedule) compounds or is drawn-down, daily.
If AAPL is up +58.25% YTD, but down 10% in a straight line (from The Bernanke Top in September) from where your money manager bought it for you, you need to be up +11.1% (from the down 10%) to get your money back to break-even. That’s not Kentucky Fried Politics. That’s just risk management math.
My immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, Tech (XLK), and the SP500 are now $1758-1792, $112.54-115.05, $79.43-80.03, $1.28-1.30, 1.68-1.76%, $30.02-30.69, and 1429-1448, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer