Selling Fear

“We have a product for sale called news, and I’m the salesman.”

-Shepard Smith

 

You can call Fox News what you will, at least Shep calls what he does like it is. Living a life in front of a camera definitely requires some off-stage face time with a mirror. I wish more people in the manic media would realize that. Self-awareness is important.

 

I’m my own media, and yes I’m a salesman too. I have no shame in saying so. Selling things you believe in is cool. Some people sell religion. Some people sell dreams. Some people sell fear.

 

It’s a lagging indicator, but Selling Fear is something that’s become quite popular for both Washington and Wall Street ever since most of these people missed calling the stock market crash. To some extent it’s about job security. To some extent it’s about group-think. To some extent it’s just plain sad.

 

Being a risk manager doesn’t mean waking up every morning and scaring the living daylights out of your readers or viewers. On quite the contrary, managing risk is about understanding that risk works both ways.

 

Orchestrating your decision making at the extremes of hope and fear is where the real risk management happens, not in front of a room full of sell-side bankers and brokers who are chowing down on some rubber chicken road-show lunch.

 

On the topic of Sovereign Debt for Dummies, I wrote about Harvard’s Ken Rogoff becoming a consensus-fear indicator yesterday. He’s right back at it again this morning, stealing the headlines of the manic media with a fear-mongering call to action against China. The headline reads “Rogoff Says China Crisis May Trigger Regional Slump.” Oooh. Ahhh. Scary, eh?

 

Not so much folks. You see, while some of these academics like Niall Ferguson, Nouriel Roubini, and Ken Rogoff should be commended on the highest order for calling out real risks before the crowd saw them coming, these guys aren’t God. At least not mine…

 

The manic media props these academics up as risk managers, when in reality what they become are classic contrarian indicators. Managing risk is like driving a car. The weather changes daily, and so do the hopes and fears of everyone else on the road. Real-time risk on the road doesn’t happen in the vacuum CNBC is piping you from the radio as the crash they missed calling is staring at you in the rear-view mirror.

 

Let’s get back to China. And for accountability’s sake, maybe you give us some knucks for calling out the Chinese Ox In a Box at the top, because my team did. China has tightened lending terms multiple times in the last 3 months, and has seen their stock market lose almost -10% of its value as a result. AFTER this self-induced correction in their own property and stock markets, Rogoff says “if there’s a this-time-is different story in the world right now, it’s China.”

 

Ok Ken. Thanks. So after selling off to higher-lows earlier this week, what did China’s stock market do on that overnight? You got it Pontiac - it went straight up…

 

China’s Shanghai Composite closed up +1.3% last night at 3022, and instead of being down -10% for the YTD, it’s now down -7.8%. Importantly, Chinese stocks are now making a series of higher-lows. They have also held what I see as their long term TAIL line of support (2897 on the Shanghai Composite). That, combined with Chinese crash calling becoming consensus fear is bullish, on the margin.

 

Again, the easier thing for me to do this morning would be to wake-up and dog-pile Rogoff’s warnings – Selling Fear. But that’s not the prudent thing to do for your portfolio. The risk manager in me is now asking the question that we asked of ourselves before getting bullish on China in December of 2008 – if there’s a consensus call lurking in the halls of those Selling Fear this morning, may that be the “short China” call that we ourselves have supported?

 

Rogoff says China’s GDP could drop to 2%. Sorry dude, not in the next 3, 6, or 12 months. Heck that might not happen for the next 3, 6, or 12 years; but, again, our risk management strategy isn’t to make open ended predictions like the one Ken just made. We focus on this thing called timing. That’s what academics like Roubini and Rogoff don’t do. Not saying when is the hallmark of Selling Fear.

 

I remain bullish on a Buck Breakout, bearish on US Treasuries, and bearish on gold. Over the course of this 2-day correction, I have moved to neutral from bearish on US stocks. At a price, I will go bullish. I dropped the cash position in our Asset Allocation Model from 64% to 61% yesterday. I’m in no rush to buy things, but Selling Fear is not what I recommend doing after virtually every stock market in the world is down on the year-to-date.

 

My immediate term support and resistance levels for the SP500 are now 1090 and 1121, respectively.

 

Best of luck out there today,

KM

 

LONG ETFS

 

XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.

 

XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.

 

UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.
 

SHORT ETFS

 

GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.

 

RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.

 

XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.

   

IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.