“Even if you are on the right track, you will get run over if you just sit there.”
Oklahoma’s favorite son, Will Rogers, probably didn’t know it at the time but he made a very important contribution to modern day risk management with the aforementioned quote.
Rogers was our kind of guy. Multi-factor, multi-duration, and not afraid to put his thoughts out there for everyone to criticize every day. He was transparent and didn’t feel compelled to live a professional life of opacity. He lived his life out loud.
By the time he passed away in 1935, Will Rogers penned more than 4,000 nationally syndicated newspaper columns and produced 71 movies. He also traveled across the world 3 times. This gave him a unique perspective on the interconnectedness of human behavior.
The most important thing we can acknowledge about human behavior when we buy or sell something is that we are human. By nature, we are more likely to think something we own is worth more than it’s worth. Ultimately, the market’s last sale decides the price.
Another critical acknowledgment in modern day risk management is that the game is changing at a rate that’s representative of global economic imbalances, fund flows, and geopolitical risks. Never before has the US government sponsored so much market volatility. Never before has the hegemony of US economic power been such a question mark. Never is a long time.
My son Jack is barely 3 years old, but as winter approaches he will be old enough to learn his first few rules in risk management. Never eat yellow snow, and never trust a professional politician.
Whoever chooses to trust Greek, Irish, or US politicians who are telling us that they’ll never have to default on any long term liability because they have figured out how to print short term debt-upon-debt-upon-debt subscribes to a belief that the history of sovereign debt cycles doesn’t support.
If you choose to trust what you see, recognizing this globally interconnected game of risk is always “risk on”, you are most likely going to see this Fear of Government trading environment plainly. You don’t have to “just sit there” and suck it up. You can keep moving.
There are two ways that I’ve applied this basic strategy of motion to express my investment views:
- Hedgeye Asset Allocation Model: Managing the gross exposure of my CASH position dynamically.
- Hedgeye Virtual Portfolio: Managing my LONG versus SHORT positions, aggressively, on a net basis.
I don’t run a hedge fund anymore. So far, this is the best I can do to communicate what it is that I am trying to recommend you do out there. I know that other people don’t do it this way. I also know that I’ll need to keep changing what it is that I do or I’ll get “run over.”
Back to explaining what it is that I’ve been doing this week…
1. Dynamic Asset Allocation to CASH:
- On Tuesday when I “Walked The Line” (title of Early Look note that morning) and the SP500 was testing a breakout above my intermediate term TREND line of 1144, I moved to 64% CASH = selling strength.
- On Thursday, after the SP500 closed down for the 3rd day in a row, I reinvested 6% of that CASH position into Commodities (DBA) and German Equities (EWG), taking my CASH position down to 58% = buying weakness.
- This morning my Hedgeye Asset Allocation is as follows: Cash 58%, Int'l FX 21%, Bonds 9%, Int'l Equities 6%, Commodities 3%, US Equities 3%.
2. Aggressively Managing Risk Around My Net LONG/SHORT position:
- On Monday morning at SPX 1125 I had 13 LONGS and 10 SHORTS.
- On Wednesday morning at SPX 1139 I had 8 LONGS and 10 SHORTS.
- This morning at SPX 1124 I have 11 LONGS and 7 SHORTS.
Naturally, some “fully invested” asset managers are going to look at this and say a few things:
- You can’t hold a cash position like that.
- You can’t time markets like that.
- You can’t …
But, yes I can.
Rather than just sit here and accept that at any given moment in my day the government can either squeeze me or displease me, for now I’m going to keep moving with an explicitly large amount of cash on the sidelines to deploy whenever I see the opportunity to do so.
My immediate term support and resistance levels for the SP500 are now 1113 and 1143, respectively.
Enjoy your weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer