Grinding Lemmings

“I am turned into a sort of machine for observing facts and grinding out conclusions.”

-Charles Darwin

It’s only fitting that after the weekly Institutional Investor “bearish” survey dropped to its lowest level since 1987 (only 17% of investors admitted to being bearish in the week of April 19th) that the US stock market got clocked. If you didn’t know that the buy-side of this business chases performance, now you know.

It’s actually somewhat sad that this profession has become a game within a game of who is the largest lemming. Like Moody’s or S&P’s ratings, I suppose everything has to be measured on a relative basis. The Johnny Come Roubinis getting amped up on the bearish side of the Sovereign Debt Dichotomy this morning are only -18.7% and -13.2% late (Greek and Spanish YTD stock market performance, inclusive of this morning’s short covering rallies).

Per Wikipedia, “the behavior of lemmings is much the same as that of many other rodents which have periodic population booms and then disperse in all directions, seeking the food and shelter that their natural habitat cannot provide.”

We’ll have to see where Darwin washes out the blindly bullish lemmings this go around, but this isn’t just about bulls having a couple of down days. Plenty a wannabe short seller has had their playoff season end the way that the Washington Capitals did last night in DC – miserably.

To have a deep respect for the opportunity that is developing on the short side of global markets, look no further than the quantification of the Pain Trade that the Roubinis and Rosenberg lovers of 2008 have endured. According to the Jedi Master of Grinding Lemmings, Sir Jeremy Grantham, “this time the recovery for the total market was 80% in one year, second only to 1932, and the really speculative stocks are almost double the market, as they also were in 1932.”

Now some lemmings will give you a blind stare when you start whipping around dates that don’t go beyond 2003, because a lot of people my age in this business had never really been forced to incorporate the macro morning research grind into their risk management process until 2008. Call your buddy and see if you can get a bead on what Ackman is going to file on next. While you are at it, sleep in.

After the Volatility Index (VIX) broke down below the 20 level in 2003, the VIX almost never traded above 21 until 2007. I for one made way too much money during that period, and I hardly believe that it had anything to do with anything more than a period of massive liquidity and depressed volatility. Never say never, but that was an aberrational performance run that will ring in my ears forever.

Four years like that can make people truly believe that their performance is due to their own intellect. When I was watching ex-Goldmanite, Josh Birnbaum, testify on Tuesday, I couldn’t help but think of the depressing reality that there are still some guys like that out there in this business. No regret or societal responsibility. No shame. The name on the back of their jersey always means more than the one on the front.

Now if you want to see someone who operates under a different mantra than that in real-life, turn on the NHL playoffs and watch a man drop his face in front of a 90 mile an hour slap-shot. He’ll take it in the teeth and hand his chicklets to the trainer on the bench so that he can get out there with his teammates for the next shift. The difference between what Blankfein’s and the NHL boys encounter is called accountability. Hockey dressing rooms have 4 walls, not a P&L and 4 trading screens.

Back to the macro grind, here’s what I am seeing out there today:

USA

1. SP500 range has immediate term upside downside in the SP-1201
2. SP500 intermediate term support down at 1140; not closing/holding above 1201 into early May should perpetuate May Showers
3. VIX breakout above both my immediate and intermediate term lines of resistance (intermediate term TREND support = 19.46)
4. Volume studies continuing to flash bearish (yesterday’s up day came on -16% day/day volume)
5. Sector Studies showing 4 out of 9 SP500 sectors now broken from an immediate term TRADE perspective (XLV, XLF, XLB, XLP)
6. Sentiment moved, barely, yesterday in the II Survey with Bears going from 17% (lowest since 1987) to 18%

International

1. China down another -1.1% overnight to -12.5% YTD remains broken on both TRADE and TREND durations
2. Hong Kong equities down again last night (-0.81%) with the Hang Sang finally breaking its intermediate term TREND line = 21,129
3. German unemployment surprises to the positive again at 7.8% in April versus 8% (March); remains our favorite country long side
4. Russia cuts interest rates for the 13th time in the last year and the market was up another +0.73% taking YTD to +9% = inflation signal
5. Latvia is getting hammered, trading down -4.6%; just one of the many countries with sovereign debt problems that are taking turns day-to-day
6. Greek CDS finally narrows to 650 bps wide; every dog has its day; Greek stocks are still down -18.7% YTD, trading below the February 8th low

Grinding Lemmings is what we really enjoy doing. All is good and fine until you become one. Maybe that’s why the life cycle on a Wall Street prop desk is so short. After all, “it is unknown why lemming populations fluctuate with such variance roughly every four years, before plummeting to near extinction” (Wikipedia).

We love to win; we hate to lose; and if we ever lose respect for the name on the front of our jerseys, we won’t be pointing fingers or saying we don’t know and don’t remember. That’s what losers and lemmings do.

Best of luck out there today,

KM