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“Since golden October declined into somber November, and the apples were gathered and stored, and the land became brown sharp points of death in a waste of water and mud.”

-T.S. Elliott

Sometimes it’s hard to take a step back from the mania of the moment. Our trading screens remind us that risk management is a daily exercise. Our crackberry culture reminds us that markets will wait for no one. This is crazy. We need to take a step back before we manage risk going forward. Let’s get real crazy and take TWO steps back. Let’s think about the recent Octobers:

  1. In October of 2007, the “smart” money thought everything was going to get LBO’d…
  2. In October of 2008, the “smart” money thought you could be short the US Consumer for life…

Now its October of 2009, and I don’t know if there is any of that “smart” money left!

While the upward price momentum of everything priced in Burning Bucks is becoming consensus. What we have learned over the course of the last 3 Octobers is that consensus can remain a pain trade until plenty a “smart” money player is taken right out of the game.

Looking at the chart below, you can see the massive melt-ups in what we call Reflation’s Rotation (from y/y deflation to y/y reported inflation). While we don’t yet have reported year-over-year inflation yet in the US, they have started to reported it (CPI) in the UK. The UK gets to import y/y inflation first - primarily because the pound got pounded first.

In the end, the Buck Burning will equate to the same reported inflation in Q4/Q1 as we lap the bombed out compares in the price of everything in this chart. Bernanke’s Depression (in prices) started last October.

Both the price of copper and oil (in US Dollars) are still making lower-highs for 2009 YTD. That said, the price of oil, in this chart shows you that it still has plenty of runway to the upside from a mean reversion perspective vs. copper and gold. All that said, I think we need to see lower-lows in the US Dollar in order to get that Oil price headed there.

We shorted oil today.

KM

Keith R. McCullough
Chief Executive Officer

Chart of The Week: Octobers - a1