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“The best thing about the future is that is comes only one day at a time.”

-Dean Acheson, 51st United States Secretary of State

For those that don’t know, Hedgeye Risk Management holds a  18-20 minute Morning Macro conference call for clients every morning which synthesizes and prioritizes the world's economic, market, and political opportunities and risks (the Hedgeye Blue Orb is now tweeting live comments from the AM meeting).  We approach risk management one day at a time, taking all factors into consideration on a daily basis.

Following that meeting, we hold our own internal meeting where the analyst team goes over industry-specific themes and individual stock ideas.  At the beginning of yesterday’s meeting, Keith mad a one off comment that “Hillary Clinton was looking good.” It was a commentary that she looked very comfortable in her role as Secretary of State.   

From a risk management perspective, the fact that we were talking about the Secretary of State was a negative.  Ms Clinton’s task isn't easy: coax the Chinese to back a tough response to North Korea’s sinking of a South Korean warship, while keeping the Chinese on board for new United Nations sanctions against Iran.

Dean Acheson was Secretary of State from 1949 until 1953, and heavily impacted the course of the Korean War and American foreign policy during the Cold War.  His tenure as Secretary of State was fraught by uncertainty and risk; he had to identify the two on a day-to-day basis and advise President Truman through a tumultuous period of foreign relations.  Acheson was heavily criticized for his perceived softness on the spread of communism and for allegedly implying that South Korea lay beyond America’s defense line and, as such, U.S. support for the new government in South Korea would be limited.  Acheson’s legacy is a point of contention.  We are not historians, but it is interesting to look to the past for clues as to how we might proceed today. 

In global risk management, it is clear that there are no insignificant markets – none lie beyond our defense line.  During our morning call, Keith will refer to “minor” countries like Romania, Poland or Greece (before it was cool) because the global markets are too interconnected to pick and choose which factors to look at.  Today, we are waking up to see global markets in a free fall after the South Korean won declined 4.3% following the Yonhap news agency reporting that North Korean leader Kim Jong Il ordered military bodies to prepare for battles.  It was a year ago today that North Korea conducted a nuclear test and several other missile tests that were widely condemned by the international community. 

Yesterday, we made the intraday risk management decision to go back to ZERO percent US equities.  On the basis of quantitative and qualitative factors, some of the same factors that led to our Q2 theme “April Flowers/May Showers”.

Quantitative Factors

(1)    What was interesting about the second meaningful short squeeze (100bps or more) since the closing low of 1071 last Thursday was that volume and volatility studies were flashing bearish on the second squeeze.

(2)    Volume continues to slide.

(3)    The VIX is running ½ the percentage drop it saw at this stage of Friday’s rally.

(4)    For the first time in the last 3 days of trading, yesterday the Hedgeye Risk Management models were registering a lower-low of immediate term TRADE support at 1055.

Qualitative Factors

(1)    The Chinese government needs to step up measures to avert asset bubbles and cool its economy

(2)    Europe is levered to the hilt - “Sovereign Debt Dichotomy”

(3)    It’s only a matter of time before the dollar is not a safe haven (future theme?)

(4)    Iran’s nuclear tensions

(5)    North Korea wants to push buttons

(6)    We are facing the greatest natural disaster the planet has ever seen…

The same risk management process also led us to short Thailand (THD) yesterday.  Thailand continues to have serious risk associated with social unrest. Yesterday, we used strength as an opportunity to get hedged in Asian equities which remain broken from a TREND perspective.

With all of this said, we see no support to 1018 (down 5.1% from yesterday’s close) on the S&P 500 and we are maintaining our zero percent allocation to US equities.  For the time being, geopolitical tensions, social unrest, economic and market expectations will over shoot to the downside in the short-term; and long-term recovery expectations are unclear and the intermediate-term game goes on.

Function in disaster; finish in style.

Howard Penney

Looking Good - KIM