MorningWord 12/1/14: Everyone Has a Plan Until They Get Punched in the Mouth

by Dan December 1, 2014 9:35 am • Commentary

If you live in the same financial news loop that I do, you have heard this Mike Tyson quote used again and again:

tyson

You’ve got to hand it to Tyson for coining (or likely re-coining) a sports metaphor that transcends the boxing ring and so aptly characterizes sudden adverse conditions that occur in most walks of life.

For you traders out there, you are likely familiar with the feeling of having a plan and having it abruptly challenged on its way to the floor.

Despite the investment world being in fairly uniform agreement that global equities are the most favored asset class, with the S&P500 just a few points from all time highs, it seems a bit insane not to take a step back and assess the massive damage being done in the energy and commodity sectors.  The same pundits that have gotten you this far in the bull market insist that oil crashing 40% in a few months is a good thing. A “tax break” for the ones who need it most. Or it’s a “supply thing”. Parts of those arguments are undoubtedly correct, but to ignore the price action of crude, industrial commodities and related stocks, not to mention the strength of the dollar and U.S. Treasuries while placing your hopes on strong U.S. GDP, lower input costs and global easing efforts means you need to have one heck of a plan in the event U.S. equities catch a mean uppercut.

Never in my career can I remember such a bizzare investment environment where investors cheer central bank intervention borne of what appears to be a rolling debt/leverage crisis, while totally disregarding massive disconnects among credit, equity, fx and commodity markets.

There are plenty of people telling you that everything is cool. No worries on the oil price thingy, or the copper price thingy, or the crashing Ruble, or the perpetually cheaper Euro, or the lack of spread between U.S. Treasuries and that of Italian Govt debt.  But it may be a good time to ask them what exactly is their plan when the music stops?  Cheer-leading is fine, but it’s not risk management. I am not suggesting to panic and sell everything, but maybe sell something.

I am not sure in what investment universe it’s a good idea to be allocating new cash to U.S. equities as a flight to quality play while everything else around it crumbles (let’s not forget about deteriorating manufacturing data in Europe and China).

We’re going to look at some portfolio hedge structures this week that can protect against any sort of sudden realization that the U.S. stock market can’t go it alone. Stay tuned.