Investment Opportunities Are Knocking

I was on a plane from Philadelphia to Pittsburgh for the last hour of yesterday’s US trading session. I missed the opportunity to buy and cover positions on the close but, patiently, I had been adding to our invested position in the asset allocation model throughout the last few days. We’re now up to a 39% invested position in US equities (as a percentage of our max allocation to an asset class) and down to a 44% in cash.

With the exception of having to endure CNBC in my hotel room (they don’t have Bloomberg TV), this morning’s global macro factors look great. Across global equity, currency, and commodity markets, today looks as opportunistic as setups come. Opportunistic? Yes. We are moving into a proactively predictable trading range. In our Q3 Macro Investment Theme call, I referred to it as “Range Rover”. Buy low, sell high.

Trading (or managing risk) around a range that we have prepared for is what we do. While we continue to have a hard time understanding what it is that some other people do, all we can focus on is what we do. That’s it. That’s our process.

As plenty of reactive investment managers sell low for the same reasons (the SP500 broke the 200-day moving average (884) yesterday), this is when you get in the game and take advantage of their groupthink. You don’t have to go to college to wake-up to a market quote and say “hey, we broke the 200-day, that’s bearish.” In fact, it’s rather sad that the sophistication of some perceived US fiduciaries only runs that deep.

We use the 200-day as an observation deck, of sorts. It’s kind of like being at the zoo actually. Bring out the bananas in and around the timing of that 200-day line, and the behavior of the monkeys is quite predictable. For those of you who are ready to throw the keyboard at me for printing that – I’ll get you a banana too. Evolve.

In the US stock market, here are the intermediate term TREND lines of quantitative support (3-months or more), that currently matter to my macro model:

1. SP500 = 871
2. Nasdaq = 1694
3. Russell 2000 = 477

I left out the Dow Jones, primarily because that’s an index that is much narrower in reach (30 inputs) and more compromised in scope (companies that need financial leverage to earn a return), than the other three. We have only been on the short side of the Dow in 2009 as a result. On my and the monkey’s scorecards, the Dow Jones Industrial Index remains broken.

Being long financial leverage (Dow, FTSE, Swiss SMI, etc…) is not where you want to be right now. From a risk management perspective, we refer to this as a “factor.” No, it has nothing to do with your latest and favorite corporate access “One-on-One.” It has nothing to do with anything you’ll “fundamentally” analyze in a sell-side research report. It has everything to do with the embedded macro risks that you are holding in your portfolio.

We want to be “long of” the economic leverage associated with Chinese demand. We want to be “long of” liquidity. We do not want to be long financially geared returns.

Sorry Mr. Levered Long Private Equity man who bought something at the top in 2007. That’s you. As we roll into the 4th quarter of 2009, the US Federal Reserve will be forced to follow the long end of the US Treasury curve. As a result, interest rates will move higher as we push into 2010 as access to capital starts to tighten again. This will create the mother load of all private equity sponsored bankruptcy cycles. Alongside John Merriwether blowing up another hedge fund this morning, that’s what you hear in this low volume US stock market folks, the changing of the billionaire hedge fund/private equity guru guard.

How do we invest in such an environment? Timing is critical, as is price. Don’t be a US equity centric “buy-and-hold” investor. Invest tactically, across asset classes around the world, at the right price.

Here are some important intermediate term global macro TREND lines of support to consider:

1. China (Shanghai Exchange) = 2597
2. Hong Kong (Hang Seng) = 16,185
3. Australia (AORD) = 3752
4. Germany (DAX) = 4658
5. Russia (RTSI) = 892
6. Canada (TSE) = 9656
7. Brazil (Bovespa) = 47,859
8. WTIC Oil = $58.92
9. Copper = $2.08

This is our investment process. These are the macro TREND lines that matter. Today is a great opportunity to get invested.

From the three US indices to the nine aforementioned global macro lines, if we see them break sustainably, I will be prepared to move. As one of the budding young stars on our analyst team, Rory Green, reminded me the other day (from one of his homeland idols, Irish soccer legend Roy Keane): “Fail to prepare. Prepare to fail.”

Comments

[Larry House:]

Nice sales pitch. Never mind that you are asking people to buy trees while the forest is on fire!

Jul 08 10:30 AM

[Trend is No...:]

Could you please refrain from telling us about 'all these great opportunities' of a busy and distracted mind. If I wanted my Wednesday morning to be filled with arrogant encouragement that the investing world is all better and ripe for the taking, I would have played monopoly with my 10 year old niece. I am sure you believe in yourself and I sincerely mean no ill will towards your abilities to generate revenue. However, I am confused about your last two written pieces: restoring trust and a now is the time to find great trades. While you may eventually prove right, a more modest approach to issues like: inflation, systemic debt at all levels, an over-reliance on consumption, the housing-foreclosure crisis, credit card debt, bailouts and corporate fraud, accounting fraud, regulatory capture, joblessness, wage deflation and my personal favorite TBTF (Too Big To Fail) financial institutions... While a lot of people have written on this and it may seem too depressing; the first order in rebuilding trust is acknowledge system problems. From my estimation after reading McCullough's blog-sport yesterday, the advice you are giving is childish. Respectfully Yours!

Jul 08 10:53 AM

[Gyoza Mimi:]

Keith,

The article reads as a juvenile uninformative piece authored to self-promote the greatness of the Guru Investor Keith the Marvelous!

Jul 08 01:18 PM

[jeandit75:]

keep flying, stop investing

Jul 08 02:24 PM

[PseudonymName:]

My S&P500 market timing system aslo gave me a buy signal yesterday but I was too chicken because of the head and sholders pattern and today I was not able to access my account to trade. I hope tomorrow is not too late.

Jul 08 04:19 PM

[pete123:]

>>From the three US indices to the nine aforementioned global macro lines, if we see them break sustainably, I will be prepared to move.

So the only thing that makes the author different from the monkeys is that he will bail at a different time? I do agree with him in that the best profit opportunities are when you catch the herd going the wrong way. But you can profit running with the herd too, either way the trick is to sense when the herd is about to change its mind :-)

Jul 08 09:28 PM

[Trend is No...:]

Easy Walter Lippman; the herd is a derogatory name used to infer stupidity and conformity? Surely profits are not the only bovine topic you speak; I am sure there are many who could categorize you into a large group and minimize your ability to make decisions, however we wouldn't call it a business herd; I am of the belief that no one right now has any authority to speak to financial recovery or ways to profit matters other than Roubini, Baker or Schiff etc.---- maybe you are in the new herd of people who think they can make a profit before the bottom falls out again; be careful man!


On Jul 08 09:28 PM pete123 wrote:

> >>From the three US indices to the nine aforementioned global macro
> lines, if we see them break sustainably, I will be prepared to move.
>
>
> So the only thing that makes the author different from the monkeys
> is that he will bail at a different time? I do agree with him in
> that the best profit opportunities are when you catch the herd going
> the wrong way. But you can profit running with the herd too, either
> way the trick is to sense when the herd is about to change its mind
> :-)

Jul 09 01:09 AM

[Gyoza Mimi:]

Keith,

Did you just create three additional accounts to evenly downgrade critics?

Jul 09 02:14 PM