Testy Bears

“Bears get testy when they come out of hibernation.”

-John R. McCullough


Yesterday was a tough day for the bulls. After seeing a low volume Buy-And-Hope rally take the SP500 straight up to 1093 by 1030AM on the first day of a new month, the market saw a stiff -2.1% intraday reversal to the downside.  The SP500 is down -3% in the last 2 trading days and down -12.1% from its April 23rd closing high of 1217.


Correction? Yes, a big one. Crash from here? Maybe.


Markets crash when consensus expectations aren’t aligned with reality. Looking at this morning’s weekly Institutional Investor Bullish/Bearish survey, I still don’t think consensus is in the area code of being Bearish Enough. This isn’t a huge conceptual surprise, but a sniff of a fleeting market bid can get a perma-bull excited. Last Thursday’s dead cat bounce in US Equities apparently inspired some Institutional money managers to get LESS bearish.


On a week-over week basis, the Bulls climbed from 39% to 40%, while the Bears in the II Survey dropped from 29% to 28%. Having traversed my fair share of bear markets with live ammo (2000, 2001, 2002, 2008, 2010), I can tell you this – 28% of the pros admitting they are bearish is hardly Bearish Enough.


Bears on Wall Street are an interesting species. Most of them are perma-bears and, without naming names (Roubini, Rosenberg, Abelson, etc.), most of them have a tough time understanding that bottoms and tops are processes, not points. Most academic and sell-side bears have never been marked-to-market with a P&L. That poses problems that are practical in nature. Never go on a bear hunting expedition if you’ve never shot a gun.


Bears in the real world don’t have anywhere to hide. My Dad lives down at our lake house in a northern part of Ontario called Shuniah. This is what he wrote to me last Thursday when I named another name that claimed I was a Thunder Bay Bear who was going to “squirm”:


“Bears get testy when they come out of hibernation. You know they cancelled the spring bear hunt in Ontario a few years back… and the young bear population has taken to the highest levels ever. The one thing about bears is that although they are fiercely hunted… they too can become the hunter, especially when challenged on their own turf! Funny how life on the "streets" can imitate life in the wild. Keep dancing - and having fun!”


Fair enough. Sometimes I get a little testy. Mostly when someone calls me into the bull/bear faceoff circle or wants to drop the analytical mitts. I write this note in 40 minutes every morning and really don’t have time to be political or popular. The game is the game. I play it with every ounce of passion in me. What you see is what you get.


Back to market expectations…


There are three bearish US market catalysts pending in the next 3 days that kept me from chasing my own tail and covering shorts during yesterday’s hopeful morning rally:


1. Wednesday – The Financial Crisis Inquiry Commission will interview Warren Buffett on the credibility of the Ratings Agencies. Given that he is Moody’s largest shareholder, this should get interesting as the patriarch of American investing deals with this subpoena and, hopefully, the truth. The ratings agencies are conflicted, compromised, and constrained.


2. Thursday - Monthly US Retail Sales for May will be released and this is the first month in forever that the Hedgeye Retail team has been signaling to me that sales are at best in line and that EPS “beats and guide ups” are going to decelerate sequentially. All that was nirvana about being long Retail last year does need to be “comped”, indeed.


3. Friday – the US Employment report for the month of May could be the bogeyman that Mr. Macro Market saw coming yesterday – versus expectations that is. Our US Strategist,  Howard Penney sent me a note and an astute question:  “Looking ahead to Nonfarm payroll number to be reported on 6/4. The Bloomberg Survey is looking for a BIG uptick (especially relative to the latest print).  The last time the spread was this wide the Economists were missing number to the downside in 2008….  What are the chances they get it right this time?”


To be sure, there are some bullish data points this morning in global macro – there usually are:


1. Brazil’s inflation rate dropped in May to +0.21% sequentially versus +0.76% in April. This is in-line with what we are seeing in the Hedgeye Inflation Index which toned down sequentially (month-over-month) in the US in May.


2. Australian GDP was up for the 5th consecutive month to +2.7% year-over-year growth in Q110, proving that you can have interest rates greater than ZERO percent and see unemployment drop at the same time as less-cyclically oriented economic growth continues (Australia has raised rates 6 times to 4.5% and can now cut if they need to – the US and Japan can’t).


3. Japan saw another Fiat Fool Prime Minister resign. It’s hard to keep track of all these guys’ names, but the reality is that the Bernanke and Trichet fiat currency experiment has a precedent (Japan). This edition of the social system’s bureaucracy lasted less than 9 months as PM. Seeing the Bubble in Fiat Politics pop is good.


To be, or not to be, Bearish Enough – that is the question. It was also William Shakespeare who gave us one of the most important lessons in risk management – “expectations are the root of all heartache.”


My immediate term support and resistance lines for the SP500 are now 1052 and 1084, respectively.


Happy Birthday Dad, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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