Fiat Flashes

“They must often change who would be constant in happiness or wisdom.”

-Confucius

 

As prices and circumstances change; we do. We’ve learned this risk management lesson from many of this world’s great strategists. Unfortunately, most of them don’t have an opportunity to lead us out of this mess. Most of them are dead.

Fortunately, crises of government sponsored groupthink give birth to tremendous change. From the fall of the Roman Empire to the falling of the proverbial Berlin Wall of Wall Street conflicts of interest, opportunities come and go. Sell high and buy low. That’s my kind of capitalism.

I started this business during the crash of 2008 because I believed in one thing – doing my own work. Some of Connecticut’s finest hedgies called me names. Some of Nebraska’s hardest working said thank you. All the while, I took the good with the bad and kept doing that one thing…

In May of 2008, there were 4 of us here in New Haven, CT. Today there are almost 40. In May of 2008, Lloyd Blankfein said the crisis was in the late innings. Today, some of those who said the same about the sovereign debt crisis before the May Showers of 2010 wish they hadn’t too.

Today is a new day in modern finance. No matter where you were positioned yesterday, here you are. Today, there are new rules. Everything you say and do will be You Tubed and Twittered. Everything in finance is moving toward where most industries have already gone. In principle, transparency is winning. Opacity is losing.

Just like me, the professional forecasters on Wall Street and in Washington are storytellers. Barring any intra-game moving of the goal posts by Fiat Fools, our stories are all marked-to-market every day. Real-time accountability in all that we tell stories about is a tremendous progress born out of this crisis of leadership.

In the month of May, we have seen plenty of Fiat Flashes. These flashes of market selloffs were proactively predictable and we aren’t done with them yet. That said, every market has a time and a price. Our task as risk managers is to use the groupthinkers as our backboard to play against. The good news is that there are many more of them than there are us.

I covered our short position in the SP500 yesterday, then went long the SPY intraday. In doing so, I took our allocation to US Equities in the Hedgeye Asset Allocation Model up from zero percent to 3%. I am not levered up long. I still hold a 55% position in cash.

The freak-outs and Fiat Flashes that you’ll see this morning in pre-open futures trading is for reactive monkeys who weren’t proactively prepared for yesterday’s selloff. Some of them literally call risk management a 200-day moving average. Now that that their branch is broken, the 200-Day Moving Monkeys are flailing. Throw them a banana, buy some stocks, and cover some shorts. You’ll find happiness that way.

Yesterday, my inbox started heating up mid-afternoon. I had a lot of questions about price, volume, and volatility. As is usually the case, there aren’t a lot of moves to make after the fact, so I went and got a haircut.

This morning was nice, because I don’t have to use hair product anymore. I have revealed some change in the volume of greys relative to the story that my Canadian hockey hair was hiding. Changing my hair color and market positioning this morning is good. After all, a great strategist once said we “must often change” if we’d like to strive to “be in constant happiness.”

My long term TAIL line (3 years or less in duration) for the SP500 remains 1070. While the plan is always that the plan is going to change, for the next 3-days of market trading I’ll be doing a lot of waiting and watching for that line to hold. There is now a full 6% of immediate term upside in the SP500 to 1136, despite the market’s intermediate term TREND line of 1144 remaining broken.

For now, the largest of the Fiat Flashes in both upside to volatility (VIX) and downside in the market (SPY) appears to be behind us.

Have a great weekend and best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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