“A little knowledge is dangerous. So is a lot”
My beautiful wife, Laura, played lacrosse in college… so in addition to a lot of pucks kicking around our house, we have lacrosse balls. My son, Jack, likes to throw these balls around. I’ve finally instilled risk management in his head however. He recently started acknowledging that these are “Danger Balls.”
For those of you who were in the game yesterday, I sincerely hope you saw the Danger Balls that we were calling out intraday. There were more of them in one day’s game than I’ve seen in my notebooks going all the way back to February.
Last week I titled a note, “Ball Underwater.” That Ball is the US Dollar. After Buffett, PIMCO, and their tail chasers rolled out the consensus barrel of US Dollar bearishness, that Ball had nowhere to go but up, so I covered my US Dollar short position and started selling down my exposure to commodities and reflation oriented equities (currently I have only a 3% Asset Allocation to Commodities, and it’s all in Gold, GLD).
When you hold a dominant global macro factor underwater for an extended period of time, now you know what happens. That ball shooting straight up yesterday was a Danger Ball! Dollar up = mostly everything priced in Dollars straight down.
As I watch the “everyone is out this week” C-team on CNBC this morning attempt to explain why the US market got hammered intraday (no one on their A-team would make my practice squad), I can only shake my head at what the Chinese must be thinking. If this is what American financial analysis is considered to be, this is embarrassing.
Last night, Larry Kudlow, who was a B-team sell sider way back when to begin with, wasn’t any better. It’s both shocking and sad that I have yet to see one of these manic media mavens actually call out the reason why we rolled over, hard, intraday. That reason was US Prices Paid.
Within the ISM Manufacturing report for August (which by the way, Depressionistas, was expansionary) is this leading indicator that we macro people use called the ISM Prices Paid report. Yes, that’s what real American companies do when they buy stuff. They pay for things in US Dollars.
The Prices Paid reading came in at what we titled in an intraday Macro note as a “moon-shot.” At a report of 65, not only was this an +18% sequential monthly acceleration from July, but a 260% year-over-year reading versus Q4 of last year!!
Who cares about Q4? Surely anyone who is attempting to invest ahead of it! While we are still in Q3, and a lot of market players want to believe that because they are on vacation that the market “isn’t doing much”, yesterday was a stiff reminder that Mr. Market waits for no one.
Danger Ball can also be subbed for what we have called a Reflation Rotation. This is simply the morphing of year-over-year deflation readings into absolute year-over-year INFLATION readings. While I don’t think you see those in the US CPI or PPI reports until October, yesterday’s Prices Paid report was one more leading indicator as to the probability of my call coming to fruition. Yesterday’s stock market move was discounting the probability of one word – stagflation.
At Research Edge we subscribe to the principle of responsibility in recommendation. An ex-Goldman Partner actually told me that’s what we do, and I’d like to thank that fine gentleman for giving us the compliment. For those of you who don’t get our intraday Macro calls, email . They aren’t free, but they are good at telling you what winning teams see, real-time, in the marketplace.
After the 10AM ISM release, here are the headlines that came out of our Research Edge Black Box:
- Just Shorting
- The “V” I don’t See
- VIX: That Ball Underwater Pops
- The Buck: That Ball Underwater Pops
The point here isn’t to take a victory lap. The point is to remind you that there are plenty of teams in this business who have a real-time risk management process. Managing risk doesn’t stop with Wall Street’s vacations. Subscribers to our exclusive network knew exactly what we think and when. They have a proactive plan that they can trust. They know I’ll be accountable to it at 4AM every morning.
Again, this is not a victory lap. It’s our simpleton submission that we are here to help manage risk. So let’s roll through the You Tube replay of yesterday.
- We started shorting stocks after that ISM report, when the stock market was up
- The “V” I don’t see, was that which the same revisionist economists who called for a Great Depression 6 months ago are calling for now
- The VIX (volatility) Index popped; breaking out intraday about both my immediate term and intermediate term TRADE and TREND lines
- The US Dollar Index popped; breaking out intraday above my immediate term TRADE line
Since 2 of the most bearish charts in all of global macro that supported one of the sharpest 6 months rallies in US stock market history were the VIX and the US Dollar, these 2 Danger Balls mattered, big time.
The confluence of the aforementioned fundamental catalyst (ISM Prices Paid), a breakdown of the SP500 through immediate term TRADE support for the 1st time since June, and breakouts in both Volatility (VIX) and the US Dollar is what it is. I have no idea how the manic media can wake up this morning dazed and confused by this.
Mr. Market got the Danger Ball memo, real time. Yesterday’s volume was a monster. My daily broad market volume study registered a +33% meltup in day-over-day volume! Market smack-down day on accelerating volume = Danger Ball.
Here are the Danger Ball levels, refreshed for last night’s closing prices:
- SP (TRADE resistance)
- Nasdaq 1991 (TRADE resistance)
- VIX 27.77 (TREND support)
- USD $78.54 (TRADE support)
Again, that’s a simple 4-factor risk management model to use as your heat map. Yes, everything can change and become rosy again, but I don’t get paid to be bullish or bearish. Our subscribers pay me to manage risk.
The right call in August was to buy every dip. That’s no longer my call. That said, I’m not bearish like I was in September of last year either. Our most invested position in the Asset Allocation Model came in August when we dropped our position in US Cash down to 23%. Today we have a 54% Cash position. Today may be a beach day for some, but when Jack wakes up in an hour, his Dada is going to be telling him it’s a Danger Ball day. No beach.
Best of luck out there today,
XLV– SPDR Healthcare — We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.
EWH – iShares Hong Kong — The current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.
QQQQ – PowerShares NASDAQ 100 — We bought Qs on 8/10 and 8/17 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.
CYB – WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
GLD – SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold. We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
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 that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.
EWJ – iShares Japan –While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
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. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.