“It is hard enough luck being a monarch, without being a target also.”
-Mark Twain
The monarchy of Keynesian Spending has finally fallen from its saddle – and the citizenry is hungry. Welcome back from your long weekend.
Away from Harvard historian Niall Ferguson pitching a version of our American Austerity theme in Aspen at the “Ideas Conference” yesterday, the most important consensus builder coming out of this long weekend came from a WSJ/NBC Poll that asked Americans what the President should worry about:
- Keeping the US Deficit down = 63%
- Boosting the US Economy = 34%
Once again, whether they are getting the message from Canadian or Scottish strategists makes no difference – Americans get it. “Boosting the economy” with government spending dollars that have no multiplier effect isn’t working. It’s time to save America’s balance sheet and get austere.
The current leadership on the economic side of the US Administration doesn’t get this yet. That’s marked-to-market by a simple 3 factor model every day:
- Currency Market: US Dollar was down for the 4th consecutive week last week, trading down another -1% to $84.61 (we are short the UUP).
- Stock Market: SP500 was down -5% last week and has closed in the red in 9 out of the last 10 trading days, making lower-YTD-lows.
- Jobs Market: US unemployment remains nauseatingly high and jobless claims jumped higher again last week to 472,000 (+13,000 wk/wk).
If this reality check doesn’t make you feel all red, white, and blue after some of the best weather Americans have had in decades, maybe it’s best to close your eyes, buy, and hope.
Maybe not.
Hope is not an investment process…
The good news here is that reality is starting to get priced into the market. As we like to say at Hedgeye, everything has a time and price. Now that we have had a -16% correction in the SP500 since April 23rd and China finally stopped making lower-lows for the YTD overnight, the US stock market should bounce.
Before I get you all bulled up and carried away here, let’s remind ourselves that bouncing to lower-highs before we make lower-lows isn’t cool – Americans get that too. We call this a bear market, and the bulls are finally starting to agree:
“I’m worried that we could have not just a soft patch but a double dip which lasts two or three quarters and where nominal GDP is only up 2 or 3 percent and that’ll have a big effect on profits… It’ll scare everybody and I’m afraid the market goes down another 10 or 15 percent if that happens.” (Barton Biggs July 2, 2010)
But don’t be scared – this was, after all, proactively predictable. As American investors, we are starting to get this too. Using the institutional leanings of perma- bulls and perma-bears always provides us a backboard of consensus to play against. The only “perma” we want to be is permanently managing risk.
Taking a step back before we have the conviction to make another market call is always critical. The institutionalization of asset management in America is something that everyone in this country needs to get.
Per the Federal Reserve’s flow of funds data, in the early 1990’s less than 40% of the US stock market was controlled by institutions and the “cash levels” of US Equity mutual funds were north of 12%. Today, over 60% of the market is controlled by institutions and cash levels of US Equity mutual funds is below 4%. That’s going to change.
If you get that the Perceived Wisdoms of the Buy-And-Hope institutional investor community is going by the way of the horse and buggy whip, you are definitely putting yourself in a position to get it right here in 2010 and beyond. The US government doesn’t “have to spend” to make this economy right and the institutional investor class doesn’t “have to be fully invested” to save their clients from losing their hard earned capital.
In the face of finding lower prices, the Hedgeye Asset Allocation Model has dropped its “cash” position from a YTD high of 79% to 58%. We aren’t asset managers, so we aren’t going to proclaim that maintaining a high and dynamically managed allocation to cash in a bear market is working for our fund – by design, we don’t have one. That said, our clients do - and its working for them.
As a practical rather than theoretical matter, we go through the positioning of our asset allocation every morning at 830AM EST on the Hedgeye Morning Call (if you’d like to trial the call please email ). Our goal is to continue to move away from the lip service Washington and Wall Street give to “transparency and accountability” and give our clients a measurable tool that they can use to augment their respective investment processes every day.
We confidently submit that if you provide investors with the right risk management “call” on markets every day, they’ll get that too.
My immediate term support and resistance levels for the SP500 are now 1005 and 1059, respectively.
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
