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“Success is how high you bounce when you hit the bottom.”

-General George S. Patton

In this game, there is no better measurement for success than the rate of return on an investment. Undoubtedly, people who live their lives making excuses and pointing fingers will take issue with that; particularly on Wall Street, where some people like to keep a relative score. In the arenas of professional sport however, the score is absolute. I think that professional accountability model has higher standards.

When considering investment opportunities, I tell my team that they can be one of three things: Bullish, Bearish, or Not Enough of one or the other. I, for one, have not remained Bullish Enough on US Equities into yesterday’s closing YTD high. That’s no one’s problem other than my own.

I made multiple sales at the YTD highs established between November 17th and December 3rd (multiple tests of SP), but was relegated to watching us make a higher-high yesterday from the cheap seats.

Higher-highs, in my macro model, are bullish until they aren’t. One day, we can all look back at the YTD high for what it was – an event in the rear view mirror. Tops are processes, not points. If you need a Wall Street/Washington economist, strategist, or academic to give you a replay of it all, we are choke full of those in this country. They are called revisionist historians.

My role as a global macro risk manager is to proactively call out probable outcomes, before they occur. Sometimes I am wrong. Sometimes I am right. We called the topping process in both Gold and Oil this year. We also called the bottoming process in short term Treasury yields. At the same time I feel shame for missing yesterday’s SP500 ringing the register at 1114.

Yesterday’s higher-high in the SP500 coincided with a higher-high in one other major global equity market – Brazil. That’s the only country we are currently long on the International Equity side of our Asset Allocation. It’s the only major country index, other than the USA, to hit a higher-YTD-high in the last few weeks. The rest of the world’s Great REFLATION trades have started to unwind.

Brazil’s stock market bottomed just inside of a week before the US stock market did back in March. Since, the EWZ (Brazilian ETF) is up +146%. Meanwhile, the SP500 has tacked on one of the most expedited 9 month moves ever (+64.5% since March the 9th). Yes, ever is a long time. And, yes, the absolute score here has been a monstrous success for those who didn’t buy into the Groupthink Inc. fear-mongering. “Success is how high you bounce when you hit bottom.”

Today, my risk management task isn’t to live in some of the mistakes I made yesterday. It’s to wake up, smell the coffee, and make moves based on the most probable outcomes for tomorrow. Today, is just another opportunity to play the game that’s in front of me.

My favorite scene in the movie Miracle is when Kurt Russell lines the boys up on the goal line and makes them skate until they puke. “Again” … “Again” … “Again”…

Over and over again, I have learned through the lessons of my own mistakes that chasing higher-highs doesn’t work; particularly when they are not confirmed by the rest of the market prices in my global macro model. Here are some risk management thoughts for you to consider before you hit the ice out there this morning:

1.       China’s A-Shares closed down -0.86% overnight, failing to make a higher-YTD-high

2.       Japan’s stock market was down -0.22% again overnight; it remains the worst performing major equity market in the world YTD

3.       Hong Kong’s H-shares were down another -1.2% overnight; they have recently broken their immediate term TRADE line, making lower-highs

4.       Greece, turned sharply lower again this morning after their PM’s assertions of budget cuts were voted on negatively by Mr. Macro Market

5.       UAE resumed selling its stock market down another -1.5% after 1 up day of hope that Dubai’s debts for 2010, 2011, 2012 don’t matter

6.       Russian stocks continue to lose price momentum, having recently broken their immediate term TRADE line, and now making lower-highs

7.       Oil is now broken from both an immediate term TRADE ($76.91) and an intermediate term TREND ($74.30) perspective

8.       Gold has broken her immediate term TRADE line of $1148/oz and looks ripe to continue making a series of lower-highs

9.       US Dollar Index is now breaking out of its intermediate term TREND line base ($76.31), making a 2-month high, and a series of higher-lows

“Again”… “Again” … “Again”…

Its 630AM right now and I’m just getting started here. This is a short list of risk management factors that my model has flashed to me in the first few hours of what we call the grind. I know my style and process is not for everyone, but you know that I know it has edge. Closet indexers don’t grind.

The only way to solve for making a mistake like I have in not being long the SP500 at the YTD high is to find a different way to win this morning. Real men and women of this gridiron know that this is all that matters. Not losing is always the highest probability position to be in if you want to start winning.

My immediate term line of TRADE support for the SP500 is -1.5% lower at 1098. I’ll buy and cover US stocks if we hold that line. A strong US Dollar is going to lead this country to higher real-rates of return on American fixed incomes. It’s also going to expedite the exit of losing players who we need to get off the ice. I look forward to that. “Again”!

Best of luck out there today,

KM

LONG ETFS

 

VXX – iPath S&P500 Volatility For a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14.

 

EWZ – iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil’s commodity complex and believe the country’s management of its interest rate policy has promoted stimulus.

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).

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.

SHORT ETFS

 

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.

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.   


XLY – SPDR Consumer DiscretionaryWe shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30 and 12/2.

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.