Take Profits

This note was originally published at 8am on September 12, 2013 for Hedgeye subscribers.

“In faith there is profit.”

-Saikaku Ihara

 

In blind faith (in government and/or your research process), there are also losses. So make sure you keep moving out there. The history of your money in public markets is that politicians and/or Mr. Market are always looking to take it away.

 

The aforementioned quote comes from an epic chapter in the late Jack Weatherford’s The History of Money titled “Knights of Commerce”, where he chronicles the history of The Knights Templars who, at one point, “became businessmen who ran the world’s greatest national banking corporation.” (pg 65)

 

Then along came a French plunderer (King Philip IV) and that was about it for the Knights. “Phillip took the management of his finances out of the hands of the Templars and established the Royal Treasury at the Louvre… Philips desperate need for money arose after he tried a trick that Nero had pulled a thousand years earlier: he debased the silver currency of his realm.” (pg 68)

 

Back to the Global Macro Grind

 

Both Gold (-1.6% to -20% YTD) and Silver (-2% to -26% YTD) are being debased (again) this morning. So you have to be careful in defining what you think “money” is. In the intermediate-term, the value of all moneys is cyclical. And you have to risk manage that.

 

Or at least that’s how I roll. I don’t really trust that the value of anything that trades on anything that is attempted to be centrally planned has a super secret biblical “value.” Every morning we wake up to politicians trying to mess with our profit plan.

 

The plan remains that the plan is going to change – and with that, let’s get on with our day. Here’s this morning’s setup:

  1. US Equities = immediate-term TRADE overbought within a bullish intermediate-term TREND
  2. Japanese, German, and British Equities = immediate-term TRADE overbought within bullish TRENDs
  3. Government Bonds (Treasuries, JGBs, Bunds, and Gillts) = immediate-term TRADE oversold within bearish TRENDs

In other words, being long stocks (and short bonds) for the last few weeks has been fantastic – so take some profits.

 

While it’s a pretty straight forward communication process to tell you when I am buying things while people are freaking out on red, sometimes I confuse people when I then turnaround and sell some of what I bought.

 

I don’t take offense to that as I am often confusing myself! That’s where embracing the uncertainty (signals) in my process leaves me at this stage of my career. I listen to the risk management signals before I listen to the little squirrels in my head.

 

#squirrely

 

To boil this process down to the bare Mucker bones:

  1. When a stock, bond, currency, or commodity is immediate-term TRADE overbought, I sell some
  2. When a stock, bond, currency, or commodity is immediate-term TRADE oversold, I buy some

That’s it. So easy a hockey player can do it.

 

And by making every mistake I make out loud for the last 5 years (over 2,000 long/short positions #timestamped on a spreadsheet in the public domain), it’s helped me learn how to make less mistakes faster.

 

No, that doesn’t mean I won’t make a big mistake like I did yesterday (I should have sold Restoration Hardware (RH) on the immediate-term TRADE overbought signal into the print, and bought it back on the red reaction).

 

It just means that I usually understand what I did wrong and why.

 

What makes this whole “taking profits” exercise all the more confusing is this un-cooperative little critter called research. I’ve built my entire research team (27 analysts) on a platform that is looking to make intermediate to long-term calls on stocks, bonds, currencies, and commodities. That means (sometimes) the immediate-term signal conflicts with the longer-term picture.

 

Sound familiar?

 

You bet it does. I don’t care if you are a day trader or someone who has bought and held since Nero. What is happening right here, right now, affects you in some way, shape, or form. If it doesn’t, you aren’t reading this anyway.

 

Back to the RH example. Brian McGough’s long-term view on Restoration Hardware (RH) is that the company will earn $8.00/share. So, even if the signal said it was immediate-term TRADE overbought at $80, why would I sell some of that? Well, that’s pretty straightforward too. Because it just had a 12% down day after signaling immediate-term TRADE overbought!

 

The risk management lesson here is that there is only a chance to take profits if you have faith that your process is repeatable. You have to understand why you make every move. Otherwise you’re just guessing. And one day, Mr. Market will take all those profits away.

 

Our immediate-term Risk Ranges are now as follows (we have 12 Big Macro ranges in our Daily Risk Range product too):

 

UST 10yr Yield 2.86-3.03%

SPX 1662-1695

VIX 13.17-14.98

USD 81.41-82.09

Yen 98.75-100.91

Gold 1341-1391

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Take Profits - Chart of the Day

 

Take Profits - Virtual Portfolio


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