Never Forget Rules 1 and 2

“Rule #1: Do not lose money. Rule #2: Do not lose money. Rule #3: Never forget rules 1 and 2.”
-Roy Neuberger

Roy Neuberger was born on July 21, 1903, and was orphaned by the age of 12. Mr. Neuberger came to Wall Street on his own in 1929 before the crash and Great Depression. Over the course of his storied career, he figured out a thing or two about proactively managing risk during economic downturns. Neuberger’s “Guardian” Mutual Fund was one of the first no-load funds in this great country.

Today, as Dick Fuld continues to wrestle with one of the most classic investment mistakes people make, I can’t help but be saddened by where Lehman Brothers has brought this great American Capitalist’s namesake Asset Management business. That mistake, of course, is sell what you can, not what you should.

This mistake happens quite often during times of economic crisis. In the end, after firms are forced to liquidate, they end up holding their most toxic paper, rather than their most precious. This is the tail that’s wagging the dog right now in the US stock market. As investment banks, hedge funds, and mutual funds are forced to raise cash and de-lever, everyone on their respective trading desks knows that their biggest investment mistakes remain on their books.

This is why the volume and volatility sirens are ringing again. Its ‘Macro Time’ - from Asian currencies to Brazilian oil stocks, the asset management community is selling what they can. “It’s global this time”, remember? That means that TED spreads widening, European junk bond yields rising, and Ukrainian stocks crashing are all one and the same thing. This is the start of people finally being forced to sell what they should have in the first place.

Asian stock markets continue to crash this morning with the region hitting 3 year lows. China led the way to the downside again, closing down another -3.3%, hitting new year-to-date lows and taking the cumulative loss in the Shanghai Exchange to -66% since the October 16, 2007 nosebleed peak. Japan closed down another -2% overnight, and I remain short that market in the ‘Hedgeye Portfolio’. The only thing that has changed fundamentally in Asia is that the masses are figuring out fact from fiction.

European stock markets continue to be weak after the Bank Of England’s chiefs (Blanchflower and King) outline that their domestic economic situation continues to deteriorate. At a point, this is going to equate to the BOE and ECB cutting interest rates. With commodity led inflation cooling to the tune of -24% in the CRB Commodities Index since early July, European central bankers finally have some room to breathe. The Euro’s decline will raise imported inflation, but at this point commodity prices and economic growth are dropping at a faster pace than currency losses.

In Latin America, stock markets continue to get pounded, as they should. Brazil is actually raising interest rates again here this morning to 13.75% - global cost of capital continues to rise as access to it tightens. Local inflation in Brazil is much like emerging Asia and Eastern Europe – they have a wage spiral component, don’t forget. All the while, as everything from fertilizer to oil gets sold out of asset manager portfolios, the US Dollar continues to strengthen. The greenback is +11.8% since its mid July lows. US denominated cash is indeed being crowned as King!

So what to do next? I say more of the same. I moved back to 84% cash earlier this week as I just couldn’t stand the idea of losing money. Putting my family’s hard earned capital at risk would be reckless at this stage of the economic cycle. Yes, you’ll hear the bulls tell you that “there’s so much cash on the sidelines”, and “people have to own something”… if I hear it once an hour, I hear it 100 times. Unfortunately, that’s both theoretical and consensus.

People don’t have to buy anything. Ask Roy Neuberger. At a bare minimum, never forget his rules 1 and 2.

My new downside target in the S&P 500 is 1209.79.

Good luck out there today,

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more