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:
- SP500 = 871
- Nasdaq = 1694
- 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:
- China (Shanghai Exchange) = 2597
- Hong Kong (Hang Seng) = 16,185
- Australia (AORD) = 3752
- Germany (DAX) = 4658
- Russia (RTSI) = 892
- Canada (TSE) = 9656
- Brazil (Bovespa) = 47,859
- WTIC Oil = $58.92
- 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.”