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This note was originally published at 8am this morning, September 10, 2010.  INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.


"We're not used to 14-9 victories, but we're used to winning."
-Drew Brees

Q: For all of the overpaid professional politicians in Washington this morning - what do the mid-month 2010 US stock market rallies of February, July, and September have in common?
A: Winners (Winter Olympics, World Cup, NFL Season).
Investment Conclusion: politicians, stop intervening in this game and go away.
New Orleans Saints quarterback, Drew Brees, reminded the real grinders of this country what makes us wake up every morning expecting to win. Brees doesn’t point fingers. He doesn’t fear monger either. He’s one of the fastest in the world at changing his mind as the game that’s in front of him changes. He makes calls and he holds himself accountable to them. Drew Brees is an American Risk Manager that is used to winning.
What does this have to do with managing risk across global markets this morning? A lot. The behavioral side of analytics and how it applies to decision making in modern day finance is still in its very early days.

EARLY LOOK: We're Used to Winning - Screen shot 2010 09 10 at 9.12.44 AM

Neuroscientists, like my friend Dr. Richard Peterson, are starting to enlighten us about the intersection between investor psychology and financial markets. I’ve mentioned his 2007 book “Inside the Investor’s Brain” before as one of the most important risk management books I’ve ever read. Peterson just published “Market Psych” on September 7th, and it’s on the top of my reading pile this morning.
The intersection between confidence and fear is one of the most important factors in my multi-factor, multi-duration, risk management model. If you have a market that’s dominated by what the government is going to do next, and the core marketing message of that government is fear mongering about great depressions and keeping “risk-free” rates of return at ZERO percent, the impact on confidence becomes very real.
I don’t need a loser who gets paid to politically pander to tell me how to think about market risk or the bottoms up factors in meeting my employee payroll. Nor do I need them to eliminate the rate of return I have on the hard earned savings in my family’s bank account. What I really need is for the government to just stop and leave me and this market alone. You want a solution, Mr. President? Try that.
From the front line manager at a McDonald’s this morning to an offensive lineman protecting Drew Brees’ blind side last night – these are the men and women of this country that inspire our competitive spirits and drive a positive confidence interval in our decision making. Americans are back from Labor Day vacation showing a renewed spirit to persevere – this time, Mr. Big Government, just leave them alone.
I’m certain that I won’t be accused of being bullish since April, but don’t confuse the winning side of this game with a lack of confidence. For me, there is no such thing as the “risk on, risk off” game of finance often bandied about by pundits who have never traded a P&L in their life. Risk is always on. Confidence isn’t about being bullish or bearish. It’s about being right.
Not unlike the NFL on NBC.com last night, our revolutionary Hedgeye Risk Management Portal shows you everything that we do and when we do it. There is a replay on the competitive fields of real-life folks – we’re early in showing this to the world of finance. We think others will follow.
Since September 3rd, you’ll notice that this cuddly Thunder Bay Bear has done nothing but BUY long positions and COVER short positions. It’s not my job as a risk manager to bypass calling an audible when the game in front of me is changing. In the last week, Americans have become more confident and so has the US stock market’s internal risk management factors on our immediate term TRADE duration.
The top 3 plays of the week that are driving US consumer confidence higher are as follows:
1.      The ABC/Washington Post Consumer Confidence report improved from minus -45 to -43 this week.

2.      MBA Mortgage Applications rose for the 2nd consecutive week by +6.3% on a week-over-week basis.

3.      Weekly US jobless claims dropped for the 3rd consecutive week to 451,000 this week down from 500,000 in the week of August 23rd.

You can go back and see how many of our short positions we covered between August 24th and 25th (when confidence and mortgage applications bottomed). The instant replay doesn’t lie; people do.
The bottom line then was that the volatility index (VIX), or one of the clean-cut measures of concurrent fear was peaking in the high-20’s. All the “valuation” models that the Warren Buffett wannabes of this game use don’t work until prices reflect the appropriate Fear-Discount. If you are going to strap on the risk management pads and actually trade this game, keep that in mind.
My greatest fear about NOT being short the SP500 (SPY) here is that after I get fired up watching some of America’s finest on the field on Sunday, some “government is good” loser comes back into my life on Monday with another failed policy game plan that smokes all of the confident players in this country right back into their holes.
My immediate term TRADE lines of support and resistance for the SP500 are now 1085 and 1123, respectively. Go Redskins.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer