Subscribe to get this note in real-time.
It was originally published at 8am this morning, September 13, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
____________________________________________________________
“A man should look for what is, and not for what he thinks should be.”
-Albert Einstein
Upholding the principle of that Einstein quote has to be one of the most challenging aspects of this risk management game. Most investors have a confirmation bias that guides their decision making. Over the years I’ve started using blunt mathematical instruments to attempt to impair mine.
Being bearish on US Equities since April 16th was the right call. Starting to cover our short positions on August 24th (covered SPY, IWM, XLY, etc. that day) and going long Chinese equities (bought CAF) on August 25th were good calls. Staying perpetually bearish on everything US or China is rarely a good idea.
One could argue that I made a wrong call selling our US Equity exposure too early this month (we moved to a 6% position in our Asset Allocation model in late August, buying Utilities and Pharmaceuticals). I’d have no argument in response. This is what we call the score. It doesn’t lie.
The score coming out of Washington last night was finally good. The Washington Redskins beat the Dallas Cowboys 13-7 and China re-accelerated their leadership in global economic growth. If you didn’t know why oil, US Equities, and US Treasury yields broke out above critical lines of resistance late last week, now you know…
Here’s a Chinese weekend data check:
1. China’s Industrial Production growth re-accelerated sequentially (month-over-month) to +13.9% y/y in August versus +13.4% in July.
2. China’s Retail Sales growth re-accelerated sequentially (month-over-month) to +18.4% y/y in August versus +17.9% in July.
3. China’s Consumer Price Inflation (CPI) continued to accelerate, climbing to +3.5% y/y in August versus +3.3% in July.
Now this isn’t all of the Chinese data and, like it is in America, I’m certain that part of it is made-up… but it’s certainly better than Made-off type data and whenever our professional politicians attempt to chastise China or its data, they should seriously think about that.
The #1 reason why we are long China is the exact same reason why we were short China at the beginning of 2010. The core tenet to our Q1 Hedgeye Macro Theme - Chinese Ox In a Box – was that the Chinese were going to tighten the screws on speculative growth. They did. Economic growth slowed for almost 7 consecutive months. And no matter where you go this morning, here China’s data is – re-accelerating for the 1st time sequentially in 2010.
Whether you are a chaos theorist or not, you need to “look for what is, and not for what you think should be.” Jim Chanos is a world class short seller and he can be convincing in his longer term duration call that China can blow up. But I can tell you that is not happening today. In fact, I’ll put my risk management neck out on a limb here and make the call that China isn’t going to blow up this week either!
China is what it is right now – re-accelerating growth.
Sure, this will come at a cost to both your equity short positions (futures up) and the Chinese citizenry (inflation up). The world’s dark little deflation secret is that it’s not happening anywhere other than in certain assets domiciled in certain Fiat Republics. If you own J.R. Ewing’s 1980’s ranch on steroids and thought that having llamas grazing the front of your Connecticut front yard was going to inflate your property value in perpetuity, sorry to tell you like it is…
Here’s a real-time Asian market price check:
1. China’s Shanghai Composite trades up another +0.9% overnight , taking its rally from the July lows to +13.8%.
2. Hong Kong +1.9%, South Korea +0.9%, and India making another new YTD high trading up +2.2%.
3. Japan even caught a bid, giving a Fiat Republic a bone, getting the Nikkei to close above its immediate term TRADE line of 9,190.
Here’s a real-time Europe/Middle East market price check:
1. Germany’s DAX is up another +0.8% (bullish TRADE and TREND; we are long EWG), and now up +5.1% for the YTD.
2. Spain +1.1%, Italy +1.4%, and Ireland +1.3% as the pain trade for those who shorted the Euro’s bottom in June continues.
3. Russia +1.5%, Norway +1.2%, and United Arab Emirates busting a +2.3% move to the upside as oil breaks out above our TREND line.
Here’s a real-time Commodity/Currency market price check:
1. CRB Commodities Index indicated up again this morning after going bullish from a TRADE and TREND perspective 3 weeks ago.
2. Oil prices have confirmed the critical breakout above our intermediate term TREND line of $75.70/barrel last week.
3. Chinese Yuan/USD 6.75 this morning is a new record (post 2005) high and Euro/USD is trading solidly above TREND line support of $1.26.
I guess Timmy shouldn’t have called the Europeans piggies and the Chinese manipulators. After all, in the end markets and political lives all find a funny way of finding where everything starts – not for what the conflicted and compromised want them to be, but for what they are.
We’ve reduced our cash position in the Hedgeye Asset Allocation Model to 55% (down from last week where we started the week at 64% and down from our 2010 YTD peak cash position of 79%). My immediate term support and resistance lines for the SP500 are now 1107 and 1129, respectively. The greatest risk to not being short US Equities right here and now is that Congress is back in session today.
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
HEDGEYE RISK MANAGEMENT
