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    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

“You’ll miss 100% of the shots you don’t take”
-Wayne Gretzky

After seeing Warren Buffett quote Gretzky last week, I guess the barn doors have been opened for we men of the ice to start quoting the man they call “The Great One” in investment letters! Life is definitely too short not to take the shots. Amen.

Some people opted to move to cash, at the market’s bottom. Clearly, they wanted out of the game when most did. We don’t need to pay them 2 and 20 for that. If you want to be in this game, you better have a process. We have one that allowed us to take our shots buying stocks on October the 10th when they “V” bottomed. The SP500’s intraday low was 839 and the closing price for the history books found the back of the net at 899. From the intraday low to yesterday’s closing high of 985, “Mr. Market” has given us a plump +17.4% gain. From that closing low to closing high, the SP500 has issued us a +9.6% return in 6 trading days. If you don’t “trade”, maybe these moves aren’t of interest. Or are they?

Stylistically, it has always fascinated me to hear how different investors in this business are this type of guy or that type of gal. “Value”, “Growth”, “Momentum”, “Butterfly Wing Nut”… it’s all out there. We’re in the business of being the guys and gals who are right. Do your own research. Be your own process. Sell high, buy low. This is only as complicated as you are pretending to make it.

We fortuitously covered a lot of our shorts in the morning yesterday. In the last week, we have covered many of our country ETFs (India, Japan, Austria), and locked in gains on our higher beta shorts. Days like yesterday, with the SP500 +4.8%, and Chinese ETFs trading 2x that beta, can wreak havoc on portfolios that have beta mismatch. In English, that means you think you are hedged, but your shorts have higher betas than your longs, and they squeeze you to the point of not being able to realize a positive return on an up day. It used to happen to me all the time. Trust me, it sucks.

Math is a wonderful thing. It allows us to manage away from embedded portfolio risks like beta mismatching. It also helps us monitor sentiment in a more systematic way. Yesterday’s move in both volatility and credit spreads were critical macro factors that had us move to a longer position in the morning. The VIX (volatility index) closed at 52.95 yesterday - that’s a 24% drop from where we started buying stocks! You don’t need a PhD in math to know that that matters. Nor do you need one to realize that the TED spread (3mth Treasuries vs. 3mth LIBOR) has narrowed by almost 150 basis points in the last 6 trading days. Combined, these factors are very bullish.

This morning, rather than spend your time reading the Wall Street Journal’s page 1 article about “China’s slowdown less likely to stave off a world recession”, I think you are best served to proactively monitor the global factors at work within this increasingly interconnected global market place. I guess yesterday’s history report woke someone at News Corp up to the fact that China has slowed – hello, “McFly”, yesterday’s GDP report was the 5th consecutive quarter of slowing. This is not new. Markets are discounting mechanisms of future events, not historical ones. China has already lost almost 70% of its value from this time last year.

Yesterday, we issued an intraday note to our ‘Research Edge’ Macro clients titled “Chinese GDP Outlook: Are We Bullish Enough” (www.researchedgellc.com, 10/20), and I guess it’s only fitting that this note was effectively the antithesis of the WSJ’s this morning. It would be hard to be as bearish as we were on Asia 9 months ago, so now we get to be that guy who is annoying the shorts, rather than being the bear annoying the bulls. This business is only as complicated as you want to make it. Sell high, buy low.

Our SP500 model remains in a negative intermediate “Trend” position, but is building positive immediate term “Trade” momentum. Provided that the SP500 can hold and close about the 952.11 line, it’s still safe to be partially invested in US stocks. Our math says that the US market has another +6% upside from yesterday’s close. As prices and fundamental data points change, we will. This complex system of market factors maintains an underlying simplicity in its behavior. Rather than arguing about whether you are a “value” or “growth” guy, now is definitely a good time to consider the guys and gals who have a process that’s allowing them to take the shots, and score.

Best of luck out there today,
KM