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“Is it not strange that desire should so many years outlive performance?”

-William Shakespeare

This morning’s global macro risk management setup feels as strange as it has since September of 2007.

As most market historians will recall, the S&P 500’s run from Labor Day of 2007 until the first week of October 2007 was the final countdown to get out. That’s not to say that the shorts who pressed the August of 2007 lows didn’t get run over in September of 2007 by the way. I, for one, got crushed.

I’m not one to say that market history repeats, but I am a big believer that patterns of market behavior rhyme. Think about both the absurdity of the prices paid by Private Equity and LBO firms in 2007 and then rewind the quality of yesterday’s “rumor mill” about everybody buying everybody. The sad reality of our business is that the hopes and desires of low quality market players trying to make a living on rumors is many years outlived by actual performance.

The performance of the S&P 500 from September 4th – October 8th of 2007 was +4.3%. The month-to-date performance of the S&P 500 for September of 2010 is +4.7%. You can tell me what parts of the “M&A” rumor mill is driving this low-volume rally to lower-highs. I can tell you that it’s not insignificant.

I can also tell you that there are significant and strange developments occurring across global markets this morning. Remember, managing the risk associated with a rally in US Equities requires analyzing the multi-factor and multi-duration price action that’s driving this globally interconnected ecosystem. The best I can do this morning is summarize how strange this is all feeling by major geography.

Before I dig in geographically, it’s worth mentioning that there is one major factor governing news-flow worldwide right now – professional politicians fundamentally believing that they are the arbitrators of all our desires. Strange.


1.       Asia


Other than Japanese equities crashing again (Nikkei 225 down -20% from its April peak) and few in the Manic Media acknowledging that Japan is a much larger long term issue than Greece, isn’t the following comment from Japan’s Finance Minister, Yoshihko Noda, this morning strange?


“I feel strange that China can buy Japanese government bonds while Japan can’t buy theirs.”


Capitalistic note to bureaucratic self: the world’s largest creditor can buy whatever they damn well please. You, Captain Debtor Nation, shouldn’t feel strange at all now that you have compromised and constrained your economic system with systemically impairing levels of leverage.


By the way, this is how a spokesman at China’s Foreign Ministry, replied in Beijing today. “We will decide whether or not to buy one country’s bonds according to our own needs.” There’s nothing strange about that.

2.       Europe


Watching Bloomberg TV’s Andrea Catherwood interview Greece’s Director General of Public Debt Management Agency, Petros Christodoulou, this morning was beyond strange. Never mind what a professional politician is doing with a title that long, what in God’s good name do market participants expect him to say about Greece’s debt?


In Q2 of this year, we introduced a Hedgeye Macro Theme called “The Sovereign Debt Dichotomy.” The long term cycle work on the sovereign debt default cycle was backed by Reinhart & Rogoff and our core thesis remains long term as cycles like these are. The bottom line is that sovereign debtor nations will be forced into restructuring or default at different points in time for the balance of the next 3 years. They won’t all happen at once!


Is it strange that Denmark (up +22% YTD) is trading up +0.79% this morning and Greece (down -28% YTD) is trading down again after getting clocked yesterday? Is it strange that Petros “rules out restructuring”? or is it just strange that a professional politician like this actually matters to markets?


3.       USA


Price action in US Equities is definitely improving. I can call that strange – I certainly did in 2007! But strange can remain longer than a short seller can remain solvent. Learning from my mistakes and evolving the risk management process is where I’m focused on improving.


Both the weekly ABC/Washington Post Consumer confidence (-43 vs -45) and MBA Mortgage Application (+6.3% week-over-week) reports were better than expected yesterday. For the two big things that matter for US economic growth (consumer spending and housing), there should be nothing strange about the fact that the only moves I made in the Hedgeye Portfolio yesterday were buys and covers. As facts change, I need to.


While these data points appear strange in the immediate term, they are real. It’s also important to Distinguish Our Immediate Term Duration from the Intermediate Term bearish TRENDs we continue to forecast in both US consumer spending and housing.

While I don’t think it’s strange that the US market won’t focus on something like Harrisburgh, PA defaulting on its September 15th payment until they actually miss the payment, it’s sometimes strange to just think about these things out loud from the fishbowl that is my office in New Haven, CT.

Whether its in CT, IL, or AZ, these states and the municipalities that they house are going to be feeling more and more strange as they march down the Road To Perdition that many European states have already trekked. Will Illinois be the next Greece?  Will the US Federal Government be forced to bail out municipalities and states like the EU had to with Greece, Spain, and Portugal?

If China is selling US Treasuries and buying Japanese Government Bonds, where will we get the money? There should be nothing strange about asking yourself these risk management questions.

My immediate term support and resistance levels for the SP500 are now 1086 and 1107, respectively. If 1086 can hold, I’ll continue to be far less aggressive with my shorts this September than I was in 2007. This Time Is Different.

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Feeling Strange - 1