Storytelling

Whoever is careless with the truth in small matters cannot be trusted with the important matters.
~ Albert Einstein

Today is a great day for my family - it’s my son Jack’s birthday. For me personally, it will be a special day to reflect, as this culminates the anniversary of the week in 2007 when I left the hallowed halls of titles and resume builders, put on my new shoes, and left Wall Street.

Clearly this was not a financially inspired decision (I haven’t been paid in a year!). It was one based on principle – and I thank God every day for allowing me to see that money means a whole heck of a lot less in life when you can “Trade” up for the “Trend” of spending time with the people you love. If that’s too “soft” for an investment note, that’s cool with me – I am the Editor here.

We have built a firm on the principles of transparency, accountability, and trust. This moral compass is not unlike that which Marcus Goldman must have used when he relocated his wife and 5 kids to New York City in 1869. If you have not read “Goldman Sachs -The Culture Of Success” by Lisa Endlich, I highly recommend it. One of the most inspiring chapters I have ever read, in any book, is chapter 11 (my hockey jersey number!), titled “The Family Firm.” Mr. Goldman built his firm and reputation on a “promissory note” business model – nothing was more golden in the eyes of this American Goldman than the integrity of his handshake.

Einstein’s aforementioned quote speaks to the simple structural fix that Wall Street needs most. Like my son Jack, the Captains of ‘Investment Banking Inc.’ love storytelling. The problem, of course, is that there is a small matter that is being revealed to the American public this year – the truth. Fiction is not just a sell side phenomena - storytellers are everywhere in this business. After a -39% down move in the US Consumer Discretionary stocks from early September’s high (when we were suggesting you be in 96% cash), the charlatans of certain “buy side” firms were firing off emails and IMs to the Street yesterday that the US Consumer is in trouble. Gee, thanks for the “Early Look”…

As these markets gyrate, the story telling finds what Nasim Taleb appropriately alludes to as “narrative fallacies”. It’s good for “The New Reality” as those new American capitalists who are liquid long cash can take advantage of it. It’s bad for the levered long investors obviously, because the manifestation of fibbing equates to higher volatility. When you slap volatility on top of leverage, things blow up.

The Volatility Index (VIX) busted out through our immediate term momentum indicator again yesterday, closing up almost +17% on the day. This made sense in our macro models as it coincided with the S&P 500 failing to close above it’s “shark line” resistance level. The result, after a +18.5% six day meltup rally, was an expedited two day -10.3% swan dive. Since the most fanciful story telling on Wall Street finds itself after the fact, you are waking up again this morning to a down -8% pre-market move in stocks like Disney because oooh, ahhh, consumer spending demand is slowing! Mickey must find this investor insight the stuff of genius.

As our Research Edge Macro clients witnessed, rather than giving lip service to “our best ideas” at some “idea” dinner, we made sales in the ‘Hedgeye Portfolio’ from opening bell to close. We weren’t saying one thing and doing another – we we’re hedging ourselves after getting too long into a bear market trap. This morning, ahead of the employment report, where the 2008 conflicted version of Goldman Sachs is warning of the apocalypse all of a sudden, my ‘Hedgeye Portfolio Allocation’ is much more prudent. We want to start buying weakness at the S&P500 line of 857, and be very respectful of making appropriate sales up at the 967 line. Yes, this is called trading. My name is Keith McCullough, I put my money where my mouth is, and I support this message.

As clearly as my macro models were flashing “getting hedged” yesterday, they are reminding me that there is every reason, in the immediate term, for the US and global stock markets to bottom this time at a higher low. That, on the margin, is bullish. If this US employment report is Armageddon, could the VIX retest 80, and the S&P500 take a gander at 848 (the prior closing low)? Definitely. But it’s where prices close in my models that matters most, not where the intraday storytelling is told. Over time, closing prices don’t lie, people do.

Asia traded very positively overnight (ex-Japan, which we re-shorted yesterday via the EWJ, that closed down -3.6%). China led gainers, and that’s what I like to see. The Chinese are the most liquid long investor in the world today. With $2 trillion in cash reserves, they have the opportunity to take advantage of “The New Reality”. Asia was really only down for a day this week, and European stock markets didn’t confirm the bearish storytelling you are currently hearing of humans abandoning their pets in back alley garbage cans in order to save their discretionary spending euros. My models like 3s – if the US and Europe can put in positive sessions today, neither are confirming the pervasive bearishness in global market rhetoric.

From a performance perspective, this week hasn’t been a good one for me. While we were down less than 100 basis points in the ‘Hedgeye Allocation Portfolio’ yesterday, my objective is not to outperform on a relative basis. My 3 objectives are: 1) to not lose my or your family’s hard earned capital, 2) tell you the truth, and 3) rinse and repeat objectives 1 and 2. A year after leaving Carlyle and my seat on the trading desk in New York City, I am thankful to report that I have accomplished all three.

Have a great weekend,
KM

Long ETFs

JO – iPath Coffee –Coffee shipments from Brazil increased 6.7 % y-o-y in October with Arabica exports up 12%.

EWL –iShares Switzerland- October unemployment increased slightly, but not enough to increase the national unemployment rate which remained unchanged at 2.6%.

EWA –iShares Australia- The Australian dollar is on its way to the second consecutive w-o-w increase against the USD.

EWG – iShares Germany –Industrial production in Germany declined the most in almost 14 years in September, declining 3.6% for the month and 2.1% y-o-y.

FXI – iShares China – -- Rizhao Steel Holding Group, the Chinese steelmaker set to be taken over by Shandong Iron & Steel Group Co., may layoff as many as a third of its 10,000 line workers because of slowing demand. Lenovo Group, announced quarterly earnings that were lower by 78% y-o-y, said slowing demand from corporate customers poses an “unprecedented challenge”.

VYM – Vanguard High Dividend Yield ETF – Detroit auto makers reportedly seek a $50 billion federal loan package. Media reports indicate that individual investor exposure to GMAC bonds has been estimated at $15 billion.

Short ETFs

UUP – U.S. Dollar Index – Former Treasury official Eisuke Sakakibara gave an interview where he predicted that in the current environment the Yen may reach 80 USD.

EWU – iShares United Kingdom –UK Individual bankruptcies rose 8.8 % from the second quarter to 27,087, according to the government Insolvency Service , while Corporate filings increased 105%.

IFN – The India Fund – The rupee completed its largest one week rise versus the dollar.

Keith R. McCullough
CEO / Chief Investment Officer