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Keith McCullough
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Research Edge, LLC (http://www.researchedgellc.com/) is the leading real-time research firm. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottoms-up and macro analysis with an emphasis on timing. The Research Edge team features... More
My company:
Research Edge LLC
My book:
Diaries of a Hedge Fund Manager
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  • Early Look: Waking Up
    “I hear and I forget. I see and I remember. I do and I understand.”
    -Confucius
     
    Managing risk up here on the high-wire of a global US Dollar Devaluation move is what it is – a daily and athletic exercise of doing. I hear the American commoner’s disgust. I see the bankers getting paid. I trade around everything I see and hear, as I try to understand.
     
    Trying to make sense of an interconnected global macro system of colliding dynamic factors isn’t for everyone. Neither is trading. Or at least doing macro and managing risk weren’t given parts of the investment process in years prior to 2008. That’s when a long/short stock picking hedge fund monkey like me could make money in a market that went straight up alongside access to capital. That’s changed.
     
    Every day we wake up to slug it out with a global macro consensus. Sometimes consensus isn’t bullish enough. Sometimes it’s so nauseating that you can only fade it. Sometimes it isn’t bearish enough. Consensus is the backbone of the market’s being. Embrace it, daily, and you begin to understand.
     
    My daily risk management process includes the measurement of ranges, deltas, and spreads. If there is something we can attempt to quantify on those 3 scores, we do.
     
    One of the weekly sentiment indicators that was shining bright red on my screens yesterday was the Institutional Investor sentiment survey. The spread in that survey was one of the most bullish we have measured in well over a year. The spread between Bulls to Bears widened to +21 points (for the Bulls).
     
    The most interesting part of the math was how bombed out the Bears were. Less than 4 months ago almost 50% of the respondents in that II survey were outright bearish (at the bottom). In this week’s report, only 26% of investors admitted they are bearish anymore (at the top).
     
    My understanding here is quite simple – and it’s no longer that investors aren’t bullish enough – investors aren’t allowed to be bearish! When your director of research or master of the hedge fund universe PM rains down on you every morning for missing the latest daily market move, you end up in a box. You end up with embedded rules that govern your analytical output – it’s called career risk management. Sometimes you just aren’t allowed to be bullish or bearish. That’s obviously a problem.
     
    So with the Chinese and US stock markets pinned up here at YTD highs and people not being allowed to be bearish anymore, what do you do? I think the best option is to wait and watch. All the while, keep measuring your ranges, deltas, and spreads. Patience provides opportunity.
     
    I know, for Mr. Qualitative Research Superstar… this part of the investment process probably makes you laugh. Trust me, there are a lot of people out there just like you. I used to be one of them. Evolving your investment process should be a perpetual exercise in doing.
     
    So let me take you through some of my basic training global macro calisthenics this morning and flash you some US market factors:
     
    1.      I have the SP500’s daily range of price probability at 43 points = tight and trade-able (bullish)

    2.      I have immediate term TRADE support/resistance for the SP500 at 989-1,010 = risk barely outrunning the reward (bearish)

    3.      I have the daily spread for the VIX at 3.15 points = volatility remains broken across durations (bullish)

    4.      I have the daily delta for NYSE volume expanding = 1st day in the last 14 where that came on a market down day (bearish)

    5.      I have the daily spread of the US market’s breadth deteriorating = one day does not a TREND make (bearish)

    6.      I have 9 out of 9 SP500 sectors in my quantitative model signaling positive TRADE and TREND = (bullish)

     
    Now let’s flip over to a cross section of asset class and geographical considerations:
     
    1.      China closed down another -2.1% overnight, taking its 2-day decline from the YTD high (+92%) to -3.3%

    2.      Australia shot up another +1.4%, 2-days AFTER signaling that their next move in interest rates is UP

    3.      Germany is up +0.4% again this morning and continues to lead mature western European economies despite a 1.44 Euro

    4.      Turkey, a beacon for emerging market growth, is flashing a big daily negative divergence this morning, trading down -2.5%

    5.      The US Dollar made a new low yesterday trading below 77.50 on the US Index

    6.      The CRB Commodities Index made a new YTD high yesterday, trading up to 268

     
    So where does this all wash out? You tell me. We all have different investment styles. We all have different durations. I don’t wake up in the morning trying to be everyone’s banker or politician. I don’t wake-up trying to be bullish or bearish. I wake-up trying my best to do, and to understand.
    Aug 06 9:02 AM | Link | Comment!
  • Cash for Clangers
    "Not everything that is faced can be changed. But nothing can be changed until it is faced."
    ~ James Baldwin
     
    Although the title of this note implies I may be teeing myself up for another rant about monkeys clanging for bananas, I’ll spare you my attempt at a zookeeper’s humor. I’m going to shift the Washington/Wall Street global macro debate this morning to a much more sophisticated place – a children’s television series.
     
    Our subscribers in the UK will need no introduction here, but The Clangers are an iconic musical band of British characters who originated from the series of “Noggin” books. Yes, to all you Mom’s and Dad’s out there – you know Noggin! – it’s the network of Dora The World Peace Explorer and Sheila Bair’s best buds, Go Go Goldman Geithner.
     
    Although the US government refuses to face the fiddle on this, the Buck continues to Burn. The US Dollar Index is trading down for the 5th consecutive week, hitting new year-to-date lows yet again this morning. Meanwhile, the Three Willfully Blind mice (Bernanke, Summers, Geithner) say nothing about the common man’s currency.
     
    According to Wikipedia, “The Clangers looked similar to mice, anteaters and, from their pink colour, pigs. They wore clothes reminiscent of Roman armour and spoke in whistles”…  Cash for the Compromised and Conflicted Clangers who are debasing our Currency - ah the alliteration…
     
    My submission is that our children will look back on this period in American history for what it is – amazing and ridiculous, all at the same time. We wake up to a Treasury Secretary clanging the alarm bells that Sheila Bair needs to fall in line and let the Federal Reserve oversee this entire gong show. We wake up to Larry Summers not saying a word about the currency his economic team is at least supposed to attempt to support. We need to wake up this morning and seriously smell the coffee here.
     
    Get your local 200-day Moving Monkey to pull up a 38-year chart of the US Dollar (1971 is when Nixon abandoned the gold standard, officially making the US Dollar the world’s currency reserve whereby bankers have had the almighty powers to create limitless leverage). That clanging monkey will quickly come to realize that there is no support for the US Dollar other than the only reference point that remains – the 38-year LOW that we established last year BEFORE the US stock market crashed.
     
    The Clangers would rather spend their time talking about another $2B in socialized aid for clunkers this morning than address this point. At the same time you have Wall Street analysts waiving off one of the bastions of what was once American corporate credibility (General Electric) having to pay $50M for fudging their numbers as a “small sum for GE.” Non-fictional stories do have inconvenient truths…
     
    Think about that thing the Rolling Stone dude said was wrapped around the face of humanity for a second and think some more. The Clangers are running around this country accusing the Chinese of “manipulating” their numbers as they continue to crush whatever credibility we have left. Again, history has a hard core way of writing herself long after the impacts of these political decisions have been made. For everything that happens to this country between now and that, the best investment advice I can give you is this – pray.
     
    Hope and prayer are a cornerstone of many people’s lives, but hope is not an investment process. If The Clangers think for one more second that the American public is stupid, this is only going to get ugly. This morning’s weekly read on US Consumer confidence (the ABC/Washington Post weekly poll) quantifies this point. As the US stock market makes daily and weekly highs, Obama’s approval ratings and the American consumer confidence that backs it continue to threaten to make new lows.
     
    Politicians, Bankers, and Debtors are all under the same short term gun here – if the Clangers don’t Burn The Buck, not one of these three core constituencies gets paid. As those recipients of a crashing currency frolic in their “Roman armours and speak in whistles”, there are two big losers here: America’s Creditor (China) and her Common Man.
     
    Part of yesterday’s intraday stock market recovery was based on the US Savings rate dropping from a 14-year high of 6.2% to 4.6%. This launched a squid onto the face of the super duper smart short seller of everything American consumer. Trust me, I shorted the US Consumer Discretionary ETF (XLY) a few days ago – I get the pain trade.
     
    America’s New Reality remains: if the Clangers are going to give away cash and keep interest rates at this fictional storytelling level of ZERO, guess what? People won’t save!
     
    If you always keep in mind who gets paid, your macro conclusions will be far less trivial than Go Go Geithner and Burning Buck Bernanke’s current Depression paralysis. The Bank of England’s chief, Mervyn King, is signaling to the global macro crowd that he is done with Quantitative Easing. This comes on the heels of the world’s most competent central banker, Glenn Stevens at the Reserve Bank of Australia, signaling that his next move is to take interest rates up.
     
    This Noggin Horse has left the barn folks. Reflation’s Rotation is in motion. Come Q4, reported inflation will be upon us here in the USA, as will Ben Bernanke chasing his own Clanger tail right up the slope of the yield curve that continues up into the right.
     
    My immediate term TRADE target for the SP500 is 1,006 and my downside support moves to a higher-high at 986.
    Aug 05 8:08 AM | Link | Comment!
  • Obama Down, Market Up

    As we were going through our weekend reading, the cover of the Economist jumped out at us.  For those of you who didn’t get a chance to read the Economist, the cover had a picture of President Obama with the title, “Crunch time”.  We typically consider the covers of most major financial publications as contrary indicators, or at least derivatives of such.  This cover actually seems to be an apt description of the President’s current predicament.

     

    As the Economist notes:

     

    “If the opinion polls are to be believed, Barack Obama is now, six months into his presidency, no more popular than George Bush or Richard Nixon were at the same stage in theirs.  His ratings are sagging particularly badly with electorally vital independent voters: two-thirds of them think he wants to spend too much of their money.”

     

    We have previewed this shift of the middle moving away from President Obama, and it now seems to be occurring in a substantial way.  We have inserted a chart below of the Rasmussen Daily Presidential Tracking Index (difference between strongly approve and strongly disapprove), which shows the inverse relationship between President Obama’s approval rating and the stock market.  The internals of the Rasmussen highlight a number of key points in regards to President Obama:

     

    • Only 11% of voters believe taxes will go down under President Obama;
    • Only 29% of voters trust President Obama on the economic crisis; and
    • Almost 76% of voters believe President Obama is too liberal.

    Rightly or wrongly, President Obama is very vigorously being categorized as a leftist President who will raise taxes and can’t handle the economy.  These characteristics are what seem to be directing Obama’s weak polling numbers as of late.  Two additional polls from Rasmussen offer evidence as to why this is the case:

     

    • 30% of voters believe that increases in government spending will help the economy and 50% believe that it will hurt the economy; and
    • 54% of voters believe tax cuts will help the economy and 19% believe they will hurt the economy.

    Unfortunately, for his approval rating, President Obama is doing the one thing that voters broadly disapprove of, which is he is increasing government spending.  The implication of this increase in government spending is that taxes will likely have to go up.   According to Associated Press reports over the weekend:

     

    “Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers both sidestepped questions on Obama's intentions about taxes. Geithner said the White House was not ready to rule out a tax hike to lower the federal deficit; Summers said Obama's proposed health care overhaul needs funding from somewhere.”

     

    It doesn’t take a group of knucklehead hockey players from Yale to figure out the obvious here, taxes are going higher, which is what President Obama’s approval rating is starting to discount.

     

    Perversely, the benefit of a declining Presidential approval rating is that it is positive for the stock market.  Ned Davis Research has done extensive work on this idea, and we conceptualize it in the chart below, but “in weeks when the presidential approval rating sagged below 50 percent, stocks rose at an annual rate of 9 percent -- versus only 2 ½ percent when the president in office sported a wildly popular 65 percent approval rating in the polls.”  No surprise, that when a President’s approvals declines too far, typically below 38%, stocks tend to fall on average 2% annually. This is not unlike our thesis on the dollar, which is that a weak US$ is positive for the stock market, to a point.

     

    President Obama’s Chief of Staff Rahm Emmanuel famously said, “Never let a serious crisis go to waste.”  For investors, the rule may be more aptly characterized: never let a serious crisis in Presidential approval go to waste.



     

    Tags: Obama, SP500
    Aug 04 8:51 AM | Link | Comment!
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