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“In three words I can sum up everything I've learned about life: it goes on.

-Robert Frost

At Hedgeye Risk Management, the number three is very important to us. …if you did not know it, you do now.

I like the sound of three-word phrases; “Fools Rush In,” “Greed is good” and “Character is Destiny.”   The last one comes up a lot when someone makes a mistake and can’t own up to it or is not held accountable for his or her actions. 

The SEC will probe the cause of yesterday’s electric trading malfunction, but we will likely learn that some overpaid MAWG (middle-aged white guy) has a “big fat finger” (love those three-word phrases).

Last night after settling in from just a crazy day, I turned on the TV.  Yes, it was on CNBC (Comcast does not have Bloomberg in my neighborhood).  Staring me in the face was another one of those three-word phrases - “Markets in Turmoil” - the CNBC special report.  The network altered its programming to produce a special report on yesterday’s price action.  I get it, yesterday was a crazy day but to perpetuate a market correction in this manner - seriously?  It was unwatchable. 

In my career, I have seen more than my fair share of days like yesterday and I will not forget any of them.  Given the speed and magnitude of the drop, it was clear that the price movement was not normal.  In a matter of minutes, Accenture did not go out of business and P&G was not suddenly worth 40% less.  Electronic issues aside, what’s important is the reason for the market decline.     

As a firm, we are positioned perfectly for a difficult May, with two of our three key themes for Q2 (April Flowers/May Showers and Sovereign Debt Dichotomy) playing out on the big screen.  Notwithstanding the potential for a MAWG with a fat finger, the market correction is perfectly normal and we are not crashing.  That is not to say we don’t have issues to deal with, we do, but it’s not 2008 all over again. 

This week’s RISK AVERSION trade has seen the dollar index move up 3.7%, which is a move in the DXY we have not seen since October 2008.  The VIX closed at 32.80 and has also seen a spectacular move this week, up 45%.  The VIX would need to go up another 140% to be at the same level it was at in October 2008. The Dollar is a safe haven for now, but our balance sheet is like “Kissing a PIIG” (think three-word phrases). 

In keeping with the Hedgeye transparency mantra, yesterday at 11:29 AM we shorted the Dollar index (UUP).  As Keith posted yesterday, we have been bullish on a “Buck Breakout” since the beginning of the year but, for a TRADE, the buck stops here.   We are shorting high as US debt issues aren't going away either.

While we are not crashing in the US, the Chinese market is close.  Last night the Chinese market was down another 1.9%, bringing the year-to-date decline to 18%.  The Chinese government is proactively slowing an economy that is white hot, but the country’s economy and its balance sheet is the strongest on the planet (For full transparency we are long the CAF).     

This is in contrast to the US economy and balance sheet, which is in very poor shape.  I wrote a MACRO note the other day that focused on the “sustainability” of the US GDP figures.  I use the theory of sustainability when analyzing stocks and, applying the same thought process to the US economy and its balance sheet, the trends are unsustainable.  Given this and the right price, it’s not a bad idea to be short the US dollar…which leads me to our new favorite three-word phrase, “Bernanke Stands Alone.” 

Yesterday, the head of the ECB, Jean-Claude Trichet was one of the last central bankers to come around and admit that inflationary pressures are real.  His two key quotes were “Inflation higher than expected due to oil” and “global inflation pressures may increase.”  How long can Mr. Bernanke stand alone and claim not to see the threat of inflation? 

The market is “correcting not crashing” and CNBC wants to perpetuate the turmoil because their viewership is falling faster that the market did in 2008. 

In closing, the most important three-word phrase of the weekend is “Happy Mother’s Day.”

Function in disaster, finish in style.

Howard Penney

Managing Director

Three Word Phrases - S P