"I followed a golden rule, namely, that whenever a published fact, a new observation, or thought came across me, which was opposed to my general results, to make a memorandum of it without fail, and at once."
-Charles Darwin
You can take Darwin's rule, or any repeatable objective process for that matter, to the bank when it comes to managing risk in markets.
On the topic of risk management, in his speech yesterday, Goldman's current CEO, Llloyd Blankfein, did the best job I have yet seen a horse and buggy whip driver do in the last 18 months. As the published facts change, its encouraging to see that some of the said leaders in our financial system have the ability to evolve their processes.
Ex-Chairman of Goldman Sachs, Robert Rubin, maintains as close to the opposite of what I (and now seemingly Blankfein), consider an objective and proactive risk management process. Mr. Rubin spoke at Yale last night, and apart from being late for his lecture (a metaphor for where he was throughout this financial crisis while at the helm of Citigroup), he proved to be what he is - a lawyer and an actor, who simply doesn't do global macro.
Lawyers are cool - I have nothing against them - but I just don't want one being the Overlord thought leader of the US Financial System (Larry Summers and Tim Geithner are his disciples). While I was impressed enough with Blankfein yesterday to stop shorting GS stock (see my note on the Portal titled "GS: Some Love For Lloyd"), once I caught wind of Brian Moynihan potentially being the successor to Ken Lewis as CEO of Bank of America, I had to re-short BAC.
Moynihan, like Rubin, is also a lawyer. Not having a global macro risk management process in what Blankfein himself echoed as what we have been calling the "global interconnectedness" of markets is basically unacceptable. Never mind not taking ANY accountability for the financial mess America is in, last night Rubin proved to me that not only does he not do macro - the man doesn't do math.
I know, it's sad and alarming altogether... and plenty a Yale Law School student was saying as much in the hallway last night after Mr. Rubin finished dancing around their questions. He reminded them that what was once considered the financial wizardry of some Wall Street billionaires is nothing more than a story we all know too well - the Wizard of Oz.
I am certainly no Robert Rubin and, as I was having dinner with my wife last night, I thanked God for that. There is no amount of money you can give me to break my Golden Rules. Call them cheesy, or not worthy of whatever it is that matters to people where the only aspiration in life is compensation and being in the club - that's cool with me. My name is Keith McCullough, and I am a Risk Manager.
Yesterday, my Golden Price Rules took me to a place where I was forced into risk management mode. As the US Dollar broke out through my critical TREND line resistance level of $84.87, almost everything that I was long stood a chance to DEFLATE. I immediately cut my Asset Allocation Model's position in Commodities from 21% to 15%. I took down my exposure to International Equities from 10% to 6%. When intermediate TREND lines like the SP500 and the US Dollar are penetrated, the Golden Rule remains - manage your market exposures!
With the SP500 down -3.2% now on the week, my decision to drop my US Equity exposure down to 4% three days ago looks less bad than my decision to stay long oil. Now I am in a position to buy more. Everything has a time and a price. In a market that's dominated by the interconnectedness of global macro factors, prices are, in and of themselves, catalysts. When you have a marketplace full of actors who are lying and hoping, the only published facts that really matter are those that are marked-to-market.
While Rubin had this sweeping diatribe last night that "no one could have seen the confluence of forces" at work within the cosmos of everything but what his 2003 book didn't miss, we men and women who have navigated the last 18 months of these markets profitably know better than to trust a politicians crutch speech. Yale's Economist, Robert Shiller, was in that room last night - if I only You Tubed the look on his face. The New Reality is that from both a behavioral and mathematical perspective, proactively predicting fear and greed is getting less trivial by the day.
Yesterday, I proactively predicted that a fall down in the SP500 through the 823 line would create further selling pressure - particularly if the US Dollar holds its bid. Now my SP500 downside target is -4% lower at 784, and provided that the buck can't breakout and close above $86.33 in conjunction with that downside test, I think the US market is setting up to make another higher low.
On the margin is that bullish or bearish? I don't know. My goal isn't to be either - it is to be right. What I do know, is that you need to approach every day with a plan. And the plan is that the plan can change. All the while, stress test your models and risk/reward matrices. If your mind and investment process has the ability to evolve, your place in history will most likely look a lot more like a great Trader named Blankfein than one Greek Philosopher slash Actor named Robert Rubin.
Best of luck out there today,


XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done).  The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide.  There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.

TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

XLB - SPDR Materials -Materials was the third worst performing sector yesterday (4/07) and has a tough time when the USD is up. It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis.  Domestically, materials equities should also benefit as the stimulus plan begins to move into action.

RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle via a quicker decline in asset prices. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.  

USO - Oil Fund-We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.  

EWC - iShares Canada-We bought Canada on Friday (3/20) into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich Vancouver should provide a positive catalyst for investors to get long the country.   

DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold. 

GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.

DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

EWL - iShares Switzerland - We shorted Switzerland yesterday (4/07) and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.3217. The USD is down versus the Yen at 99.8530 and up versus the Pound at $1.4664 as of 6am today.

EWJ - iShares Japan -We re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".

DIA -Diamonds Trust-We used our third bullet to re-short the DJIA yesterday (4/07).  We believe this "blue chip" industrial based group of companies will underperform in a market decline.

XLP - SPDR Consumer Staples- Consumer Staples looks negative as a TREND and positive as a TRADE. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan.