No Excuses

“He that is good for making excuses is seldom good for anything else.”

-Benjamin Franklin


I’m in the midst of finishing one of the more calming books that I’ve read in a while – “Benjamin Franklin: An American Life.” That’s a good thing, because there has been nothing calm about being short the SP500 for the last few days. Franklin’s wisdom is giving me some much needed balance.


In a prior life, if I was short an equity market that was going straight up I’d have compounded my mistakes by making up stories that fit my positioning.  Clearly, I didn’t know what I was doing. Note to self: if you want to find data in this business that supports your positioning, you will.


Franklin endowed this world with many practical lessons. Learning by doing and not making excuses while you are making mistakes are two of the critical ones. I’ve been bearish on US Equities and I recently re-shorted the SP500 on Friday July 9 at $107.47. As of last night’s close, the position is -2.04% against me. That makes me wrong right now. The score doesn’t lie; excuse makers do.


In terms of moving to a zero percent asset allocation to US Equities last week, 3 major mistakes I have made this week have been revealed:

  1. Not thinking that Alcoa (AA) barely beating estimates (that had been coming down) would be seen positively by the market.
  2. Not knowing Intel (INTC) would crush the quarter on one of the best earning’s releases I have seen relative to expectations in a while.
  3. Not agreeing that Earnings Season was going to be the bullish catalyst that the bulls have been talking about for months.

Now, to be fair, these are all US stock market mistakes. In terms of currencies and fixed income I’ve been short the US Dollar (UUP) and short term US Treasuries (SHY) this week and those have been wins.


Not thinking; not knowing; and not agreeing – whether I like it or not, these are mistakes that can add up to cumulative losses. A lot of excuse makers will point fingers at their analysts and blame their teammates for “not knowing” – but that speaks to the sad state of how leadership and accountability are currently defined in this modern day CYA culture. If you are wearing the ‘C’ on your jersey, act like a Captain.


As always, after making mistakes, my risk management process has evolved to a point where I take a step back before I take the next step forward. Most of you who have been following my performance for the last 3 years probably recognize this as me slowing down my decision making. All of my risk management moves are time stamped, so I don’t need to give lip service to what I am doing versus what I say I think you should be doing.


From a top down level, our risk management process is designed so that I can always take a step back and review the 3 highest conviction Macro Themes that I’d like to express with every asset allocation and long/short security position.


To review, our current Q3 Macro Themes are as follows:

  1. American Austerity (short the US Dollar and intermediate term bearish on US Equities)
  2. Housing Headwinds (short single stocks like BKD, TOL, and HCBK that are levered to housing’s double dip)
  3. Bear Market Macro (slide 25 of our 35 slide presentation outlines all of the intermediate term TREND lines that we see as bearish)

Zeroing in on the American Austerity theme is where I think we make or break ourselves this quarter. A solid argument can be made that yesterday’s appointment of Jack Lew to replace Peter Orszag as the new OMB budget director was a positive. 


Lew is actually an experienced hand in the budget area and has spent seven years in the OMB. He was lastly OMB director under President Clinton until 2001, and produced a budget SURPLUS. Since I think that the broken intermediate term TREND in both the SP500 and the US Dollar are reminiscent of what we saw emerging in Europe 3-6 months ago, this is progress. It’s Spending, Stupid.


Back to the bearish side of American Austerity, yesterday’s budget deficit for June was reported intraday and a quantified argument can be made that nothing has changed the intermediate term TREND of lower tax receipts and higher spending.


Per my defense partner Daryl Jones’ math in a note he sent to our macro clients last night titled “The Deficit Still Looks Ugly, Normalize For Tarp And It Looks Uglier”, the June headline improvement in deficit can be attributed primarily to timing of revenues.  Due to the Memorial Day shift, a large amount of tax revenue was pushed into June. 


In aggregate for the year-to-date, overall revenues are only up 0.5%, with corporate income tax contributing all of this increase growing 33% year-over-year.  Personal income tax, on the other hand, is down -4.4% in the year-to-date.  So despite the “economic recovery”, tax receipts from individuals are still lagging on a year-over-year basis (jobless recovery sound familiar?).


Additionally, while reported outlays were $73 billion, or -3%, lower for the first three quarters of the fiscal year, this decline included a reduction in nearly $350 billion from a combination of TARP, Treasury payments to Fannie Mae and Freddie Mac, and net outlays for FDIC insurance.  If normalized for TARP, so removing the $350 billion from last year’s numbers, then spending ex-Tarp is up 10.6% on a year-over-year basis!  Not good.


All the while, I was tweeted last night by the President of the United states with the following storytelling:


“Wall St. reform helps families, businesses, and the entire economy. I urge the Senate to act quickly, so I can sign it into law next week.”


And then, this morning, in a Bloomberg National Poll, “More than 7 out of 10 Americans say the economy is mired in recession, and the country is conflicted over how to balance concerns over joblessness and the federal budget deficit.”


So the people get it, but Washington doesn’t. And, unfortunately, the next leg down in both the US Dollar and US Equities will be a direct function of a Duration Mismatch between political change in this country and the gravity associated with debts and deficits as a percentage of US GDP not changing.


My immediate term support and resistance lines for the SP500 are now 1074 and 1106, respectively. The Bear Market Macro TREND line of resistance for the SP500 remains 1144.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


No Excuses - Frank

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