At World's End - Pirates!

“The only rules that really matter are these: what a man can do and what a man can’t do.”
-Captain Jack Sparrow (Pirates of the Caribbean)
 
As I was driving past Stamford, CT this morning, a light snow blew in… the morning was her usual self, plenty dark, and very quiet… it was 430AM, and all of a sudden a radio news program broke in suggesting that I should beware of pirates. No, not the Disney kind – real Somali pirates!
 
By the time I got to the office and grinded through the news of markets selling off overseas, fear had become me. The US futures “are selling off” cried a CNBC entertainer… the global economy “is in a recession” sulked another… “hedgies are selling”… a “Great Depression” cometh…  even the immortal bankers at Goldman may not get paid this year… the Black Pearl is here – we must be “At World’s End!”
 
C’mon, get serious. While it is true that “Somali pirates” boarded and took control of a Saudi oil ship last night, this isn’t that scary. After all, since the world is no longer “awash with liquidity” (as many of my investment strategy competitors can be ‘You Tubed’ as having said no less than 9 months ago) does a $100 million worth of oil banging around in a pirates barracks really matter? The Saudi stock market has been in free fall ever since we called the “Fast Money” commodity top in May. This morning the Saudi market is down another -3.5% and the United Arab Emirates tape is getting tagged for another -5.1% loss. This isn’t new. This is called deleveraging. This is “The New Reality.”
 
The simpleton math says that since Goldman was all bulled up on oil prices in July, we have seen a -63% decline in the value of the said Somali pirates’ newfound treasure. In America, we have a US Treasury Captain, who only 28 months ago loaded that very Goldman ship up to the gills with leverage. Some of the most lucrative prop trading gains in world history were cash bonuses paid out on the high seas of Wall Street “sell side” desks. Oh wait, were those “buy side” prop desks? I can’t for the life of me see through the fog. Them must have been pirates!
 
Save a banker or trader’s bonus here and there, who really cares anymore? This has basically been revealed as the biggest pillaging of the US Treasury since whenever. What can we do about it? Well… Larry Summers and Robert Rubin finally sat down with Captain Hank “The Market Tank” last night, and called him out on enough issues for any viewer to feel the tensions associated with a difference of opinion. The best thing Obama can do is have Captain Hank walk the plank. This Disney movie is over guys – the US economy is real. There are families to feed and a “New Reality” of American Capitalism that needs to take hold. “Lead, follow, or get out of the way.”
 
Back to our pirate ship of ‘Hedgeye Portfolio’ treasures. We signaled yesterday that we had taken advantage of the market’s proactively predictable market squeeze and sold into it. This morning our treasure trove is sitting comfortably on a 79% position in US cash. A few of the shipwrecked pirates bumped up against my inbox again yesterday questioning who, how, and why I could be trading around my exposure like I have in the last 3 trading days, and my answer is the same as Captain Jack’s: “the only rules that matter are these: what a man can do and what a man can’t do.”
 
There are no rules against buying low and selling high. There are definitely no rules against buying high and trying to, as “Fast Money” used to say, “sell high-ah”… but there are silly new rules like ‘You Tube’… so you better be careful out there. If you want to get in the game and manage money with pirates in the waters, sleep with one eye open. It’s really really getting scary out there…
 
My upside target for the VIX is 71.17 and my downside target for the S&P500 is 833. At those scary levels, we’ll be buying/covering stocks into the darkness of market weakness. I am praying for the snow to last. According to just about everyone in the media this morning, the forecast is for the “world’s end.” If we are all going to go down, it may as well be in the fluffy white stuff. In the meantime, the best way to beat the pirates is to be one. Argh!

Best of luck out there,
KM