“There are whole fields, like the financial world, where scientific thinking hasn’t greatly penetrated. It is mainly about assertion, personality, and salesmanship.”
David Harding runs London based hedge fund, Winton Capital Management. He is a British entrepreneur. He is a math guy. He is a market timer.
In 2009, Harding has not been getting the embarrassing Octopussy headlines of the Galleon crowd. He doesn’t need a woman in hiked up attire posing as an analyst to be his aggregator of executive Wall Street “edge” either (Bloomberg article: “Woman Who Sank Galleon Was Beauty-Queen-Turned-Analyst Insider”). His Research Edge involves anticipating market direction, mathematically.
People say they can’t time markets. Take their word for it – they probably can’t. I understand that it’s not ok for a hockey head who gets up early every morning calling markets to say that. However, it is ok to say that if you run a $12 Billion dollar hedge fund. This is the way that our sometimes disillusioned business of perceived wisdom works. It’s about how much money you make that makes you a real man on Wall Street, right?
On the compensation score, Harding is plenty real. He made $250 million for himself last year. No, he didn’t need the almighty “one-on-one” with an executive management team or a government bailout to earn his bonus. All he needed was us - the monkeys of consensus.
Are you a monkey? Did you call the 2009 bottom forming? How about the 2007 top? Tops and bottoms are processes, not points. From the Top, to The Bottom, and Back Again (maybe a good name for a book), they can be proactively managed towards, mathematically, as opposed to being reacted to, emotionally.
Let’s grind through some math. Yesterday, as the US Dollar Index burned -0.75% lower, the SP500 was up another +1.4%. The most powerful mathematical inverse correlation affecting the daily movements of global markets continues to prove itself out (the r-square is still 0.8). This won’t last forever. Correlations that are this high are never perpetual – but fighting them while they are this dominant is for men and women with salesmanship that’s far more impressive than mine.
The antichrist of market timing is the Alan Abelson (Barron’s) love story with David Rosenberg (Gluskin Sheff). Abelson was at it again this weekend, all perma-beared up and bitter for missing another massive meltup, citing Rosie’s views. Using a Monday Night Football one liner, all I have to say is “C’mon Man!” Rosenberg is the Toronto Maple Leafs and Abelson the Washington Redskins of their respective 2009 seasons – but they won’t admit the score!
This is sad and funny, all at the same time. That’s why a lot of these cats would get run-over in a real-life arena of professional sport. If you aren’t into the sports/accountability analogy, I still don’t think that the rest of the Great Depressionistas would fare too much better in a math combine this year either.
Here’s the 2009 score since March:
1. US Dollar Down -16%
2. SP500 Up +64%
For those who say this rally hasn’t been on “fundamentals”… once again, I submit a basic question – isn’t math fundamental?
Our industry is finally going to flush out the weak and make the strong, stronger. The Wizard of Oz storytelling is over. It’s about time. We still have way too many monkeys jumping on the bed. The math associated with client returns over the last 24 months will hopefully expedite the curtailing of asset management supply.
Admittedly, I have been getting ready to join the bearish camp for the last month. Our firm’s views from September of 2008 seem so long ago. Recently, I have taken down my invested exposure in the Asset Allocation Model, but I have yet to short the SP500. Timing - dear Rosie, matters.
Here are some smoke signals that came out of the Hedgeye math machine overnight:
1. The SP500 had an Outside Reversal yesterday, making a lower-high on the close at 1106 (the prior closing high was 1110)
2. The US Dollar made another higher-low yesterday, and is recovering +0.22% this morning to $75.22
3. Volatility (VIX) was almost 2.5 standard deviations oversold yesterday, and looks to be setting up to lock in an immediate-term low
4. Volume/price/volatility studies, when using them as a 3-factor model, continue to flash bearish
5. Japanese equities were down another -1% overnight, taking the correction to -11.6% since they peaked in August
6. South Korean equities were down another -0.8% last night and remain broken from an intermediate term TREND perspective
7. Chinese stocks had their worst down day in the last 3 months last night, closing down -3.5% on fears of banks issuing equity
8. Russia cut interest rates by 50 bps to 9%, and equities backed off hard on the news, trading down -1.5%
9. The price of oil, in US Dollars, is starting to break down across our immediate term TRADE lines with the most important line being $79.09/barrel
I use a multi-factor macro model. It’s all math. It’s weight adjusted. It changes dynamically as R-squares and real-time prices do.
What does that mean? Well, quite simply – it means that as the facts change, I do, because I believe that prices rule as leading indicators and people are constantly lying about why prices are doing what they do.
Chaos Theory submits that there is a deep simplicity that governs all patterns of behavior within a dynamic ecosystem. Since this is the most relevant mathematical discovery since relativity, I study it. I know that it is barely applied yet to the most dynamic of all systems – global markets. David Harding is early.
Before I sign off this morning, here’s a very simple 2-factor correlation model to have front and center on your screens.
1. US Dollar Index = $75.51 or greater
2. SP500 = 1083 or less
If those lines confirm one another, my submission is that Abelson, Rosenberg, and whoever else has been bearish for this entire move up will finally start being right. Until then, throw them a banana. When it hits them in the noggin, call that feeling “fundamental.”
Best of luck out there today,
VXX – iPath S&P500 Volatility — With the market hitting its YTD high on 11/23 we bought volatility.
XLK – SPDR Technology — We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).
EWT – iShares Taiwan — We see a pending trade pact with the Chinese as the next positive catalyst. We bought back the bullish TREND position we continue to fundamentally see in Taiwan on 11/20.
EWA – iShares Australia —We remain bullish of Glenn Stevens at the RBA and how Australia is issuing its citizenry a rate of return. With growing confidence in domestic demand recovery and a commodity export complex with strategic proximity to China’s reacceleration, there are a lot of ways to win being long Australia.
XLU – SPDR Utilities — We bought low beta Utilities on discount on 10/20.
GLD – SPDR Gold — We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.
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.
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.
EWY – iShares South Korea — South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.
XLI – SPDR Industrials — We shorted Industrials again on 11/9 on the up move as the US market made a lower-high. This is the best way for us to be short the hope of a V-shaped recovery.
EWU – iShares UK — Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative. Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.
XLY – SPDR Consumer Discretionary — We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30.
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.