Hedgeye - Unchangeable Certainty

“The only unchangeable certainty is that nothing is certain or unchangeable”

-John F. Kennedy

It was a nice long weekend. A successful May is over. Let the performance scoring for June begin.

I’m using a JFK quote to kick start the month, not only because we need some American leadership in this country, but because the last time we saw stocks get crushed like we did in May was when Kennedy was the President of the United States.

Ironically enough, the US stock market locked in a cyclical peak on the exact same day (April 23rd) of both 1962 and 2010. So far, the peak-to-closing-trough decline from April 23, 2010 has been -12.3% (1067 SP500). The question for risk managers this morning remains, are the lows for 2010 in?

The best place to start answering this question is from the top down. To understand where we are going, we better have a deep respect for where we came from. Where are we relative to our Q210 Hedgeye Macro Themes? What’s working? What’s not? Market prices don’t lie.

Sovereign Debt Dichotomy: Check, check, check. We thought Greece was the first domino of sovereign debt maturities that would concern the world; then Spain; then Italy and France. Both Spain and Italy implemented austerity measures late in May and over the weekend we saw France’s Budget Minister, Francois Baroin, admit that it was a “stretch” for France to maintain an objective AAA rating. With France’s burgeoning deficit, we concur.
Inflation’s V-Bottom: Across the world, inflation readings hit a series of higher-highs sequentially for the month of April. Our Hedgeye Inflation Index turned down month-over-month in May. Inflation’s V-shaped recovery is what every 12 month chart you look at looks like until the music stopped on April 23rd. Inflation’s V is now setting up to deflate in June. This will help insulate the Fed’s Japanese style monetary policy, and keep treasuries relatively safe.
April Flowers/May Showers: Check. One fund of funds investor from Boston had an interesting take on what we considered proactively predictable: “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor.” For the month of May, the SP500 was down -8.2%. One manager utilizing the Hedgeye long/short strategy was up +4.05% gross. Another was up +0.52% net. We’ll call that fruitful.

No matter where you go this morning, there market prices are. Spain, China, and France are down -21.6%, -23.7%, and -12.9%, respectively YTD. Our task isn’t to make excuses or point fingers. Our risk management goal is to see the game for what it has become. Are the lows for 2010 to-date already a rear-view event? Unlikely.

We run a multi-factor risk management model across equities, bonds, currencies, commodities, etc., globally. There are very few things that are flashing cover/buy to us yet. Simplifying our model on the US Equity side of the ledger, these are the 2 lines that are most concerning to me:

SP500 intermediate term TREND line resistance of 1144
Volatility Index (VIX) intermediate term TREND line support of 22.19

Provided that the SP500 can’t breakout above 1144 and the VIX can’t breakdown through 22.19, the bear market in US stocks will continue to manifest into consensus that should find another short term cyclical bottom sometime in Q2/Q3.

Another 10 intermediate term TREND lines that remain broken around the world and across asset classes that compliment this simple 2-factor US Equity bear case:

Shanghai Composite Exchange = 2933
Tokyo Nikkei Average = 10598
Hang Seng Index = 20789
London Financial Times Index (FTSE) = 5511
Spain Bolsa (IBEX) = 10499
French CAC 40 Index = 3794
Brazilian Bovespa = 66992
CRB Commodities Index = 271
Copper = 3.33/lb
WTI Oil = $79.11/barrel

Nothing, of course, is “certain or unchangeable” in our risk management model. It’s grounded in chaos theory and, after all, that’s grounded in uncertainty.

My immediate term TRADE lines of support and resistance for the SP500 are now 1076 and 1126, respectively. Our asset allocation to equities, globally, remains zero percent. We continue to be short both the SP500 (SPY) and Nasdaq (QQQQ).

Best of luck out there today and have a great month,

Keith R. McCullough
Chief Executive Officer