"If you want to succeed in the world, you don't have to be much cleverer than other people. You just have to be one day earlier."
-Leo Szilard
Today is Cinco de Mayo in Mexico; its Liberation Day in Denmark, Ethiopia, and the Netherlands; and it's Children's Day in Japan and South Korea. Yesterday, here in the USA, was the day that I started selling as aggressively as I have since January. No matter where you go in this interconnected world of global macro today... or where you went yesterday... there you are.
Here I am this morning, staring at my greatest weakness which, at times, can also be my greatest strength. Selling early is what I do. As I evolve as a professional in this game, my challenge is to narrow the gap between the time that I hit those sell/short buttons and immediate term peaks. People have always told me that you can't "time markets" - so I have made it a personal challenge to have my feet on the floor early enough every morning to prove that I can do that better than they can.
For me, being a global markets operator is a risk management exercise. I am tasked with not losing capital first, and then earning a risk adjusted absolute return where I see fundamental opportunities. Every morning I have a stare down with these arthritic hockey knuckles of mine and this keyboard. There is nowhere to run - and I wouldn't run away from being held accountable for my actions if there was. I play this game for these moments.
On balance, for the better part of the last 2 months I have been bullish. Notwithstanding that context, being wrong, on my scorecard at least, is not a relative exercise - everything is absolute. After all, in order to sell too early, one must already be in possession of something to sell. I sold my long position SP500 position (SPY) yesterday at 10:21 AM at $89.78. The SPY's gapped up into yesterday's market close, going out at $90.88 (SP500 907). That makes me wrong by -1.2%, so far...
When I made my decision to start selling yesterday, it had nothing to do with calculating how far we had run from the Depressionista low. It had everything to do with the moment that markets were in. I play the game that's in front of me, not the one that's behind me. I said that I was selling the SP500 because it was "overbought at the 896 line." The time and my reasoning has a time stamp on our web portal.
Understanding that most of the said savants of money making in this business can (and should) poke holes at what I do and when, I rarely see the time stamps on every decision they make... and I doubt I ever will...The point here isn't to belabor what it is that other people do. My simpleton advice is to focus on doing whatever it is that you do.
What I do is use a multiple factor global macro model that spans countries, asset classes, and companies. Everything is marked-to-market, and real-time prices rule the timing of my decisions. Understanding that I have not been of the "overbought" camp until yesterday, here are the assets prices in my model that remain clearly overbought on an immediate term basis as of last night's close and overnight trading:
1. China's Shanghai Composite Index
2. Hong Kong's Hang Seng Index
3. India's BSE Sensex Index
4. London's FTSE Index
5. Russia's RTSI Index
6. Brazil's Bovespa Index
7. West Texas Crude Oil
8. Copper
9. The USA's SP500
For me, the immediate term means today. Every day, as prices change. I do. While I thought the SP500 was overbought when I started selling yesterday, as prices rose, so did my upside targets. Now I see the SP500 overbought line at 903. My name is McCullough, not Madoff - and only the former would be provide one the investment opportunity to be right no matter what prices do.
In conjunction with the aforementioned 9 factors being overbought, the Volatility Index (VIX) is oversold, so I bought the VXX yesterday as well. Too early? We will have to see, won't we. My positions are all live and ticking, real-time, on the portal.
In credit land, the Fed's Senior Loan survey reminded us of what we have been seeing on the margin since the beginning of March. Only 40% of the senior lending officers in the quarterly survey said they had tightened lending standard - that was the lowest percentage reported since the January 2008 survey. Was this new news to the market? Apparently to those who have been running late in covering their shorts it was, indeed.
Much like being accused of waking up too early, selling too early is the kind of criticism that I want to be beating myself up with. The Alternative Investment solution, of course, is being late.
My downside support level for the SP500 is now 867. Look for me to be data dependent on the way down, but proactively preparing to buy back what I sold as we continue to make higher lows.
Best of luck out there today,
KM
LONG ETFS
VXX - iPath VIX-The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed. EWC - iShares Canada- 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 resourcerich Vancouver should provide a positive catalyst for investors to get long the country. EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months. With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia. 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. 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%. SHORT ETFS LQD - iShares Corporate Bonds-Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%. SHY- iShares 1-3 Year Treasury Bonds- If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries. EWL - iShares Switzerland - We 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 $1.3376. The USD is up versus the Yen at 99.1540 and down versus the Pound at $1.5072 as of 6am today.
EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point. The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
DIA - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price.
IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. We believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit.
Keith R. McCullough
Chief Executive Officer
