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McCullough: In This Market, Timing Matters

If you can manifest the change you want to see on Wall Street into your risk management style, I think you can win. Like it or not, timing markets matters. So take ownership in your investment process. Manage risk proactively.

After a massive 2-week melt-up across Global Equities, last week ended on a "stinky stagflation" note. By the time it was all said and done, commodity inflation was up a lot more than US stock market inflation. That’s not good.

Reviewing the week-over-week moves, here’s what happened last week:

  • The US dollar index went up 1.1 percent to $75.18
  • The euro/dollar trade went down 2.1 percent to $1.42
  • The CRB Commodities Index climbed 2.1 percent to 343
  • West Texas Crude Oil rose 1.2 percent to $96.20
  • Gold was up 4 percent to $1,541
  • Copper jumped 2.6 percent to $4.41
  • The S&P 500 inched up 0.3 percent to 1,343
  • Two-year Treasury yields sunk 17 percent to 0.39%
  • Ten-year Treasury yields also declined, 5 percent to 3.03%
  • The 10-year/2-year yield spread tightened 7 basis points

What does all of this mean? Timing markets gets a lot harder when you can’t bank on the Fed bailing you out with another "dollar devaluation" policy. Got an imminent catalyst for another round of quantative easing (i.e. QE3)? We don’t.

With a heightening probability of a debt ceiling debate compromise by late July and QE2 having already ended in June, our macro call here at Hedgeye since April has been for a strengthening US dollar (long UUP ) and weakening euro (short FXE ).

We’ll see if this holds, but the odds are that as Italy’s Silvio Berlusconi shifts his focus from hot-tubing to going after the “speculators,” the euro should be under duress inasmuch as the US dollar searches for Waldo. Remember, timing matters – and to get the US dollar right, you need to get the euro right.

In terms of positioning for the intermediate-term trend, I think deflating inflation and a strong US dollar is constructive for American, Chinese, and German stocks, from a price. But you have to be patient. Buy-and-hold is for the birds if you have a bad entry point.

From Monday’s closing prices, here are my top 3 long ideas:

  • 1. Go long on China
  • 2. Anticipate a flattening yield curve
  • 3. Be long US healthcare

Hedgeye has had low estimates for US GDP growth for the last 6 months. We’ve expressed growth slowing by being long the compression of the US Treasury Yield Curve . We do that through FLAT . Additionally, as Global Growth Slows, I want to buy the best major growth market in the world (China) while it’s on sale via CAF . Being long Healthcare in the XLV exchange-traded fund is just defensive.

No one said timing markets is easy. But, as Oaktree’s Howard Marks appropriately reminds us, “there are times when it’s important to invest cautiously, and there are times when it’s important to invest aggressively.” Now is the time to wait, watch, and pick your spots.

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Prior to founding Hedgeye Risk Management, Keith built a track record as a successful hedge fund manager at the Carlyle-blue Wave Partners hedge fund, Magnetar Capital, Falconhenge Partners, and Dawson-Herman Capital Management. He is a Contributing Editor to CNBC TV, Fortune Magazine and author of Diary of a Hedge Fund Manager (Wiley 2010).