Winter is Coming

While my focus is individual companies, I've been positive on the US and negative on China (and really emerging markets as a whole) for the last 2 years. That was shown roughly correct last year in a resurgent rally in the S&P 500 which outpaced most equity rallies worldwide. I was fortunate in removing most (valuation) shorts while holding on to most long ideas/companies. I now believe the tide is reversing, and even the United States will not be immune to weakness. In short:

(Source: Game of Thrones, http://www.ifc.com/fix/2011/04/game-of-thrones-premieres)

Contagion is the reason why this sell-off is different (and similar to Europe in 2011) because losses are contagious even though they seem unrelated at first glance. From the Argentinian peso/Turkish lira devaluation to China credit contraction and Brazil slowdown, global markets have started falling in tandem again - the Fed taper is simply the catalyst. Animal spirits are rising again, and levered funds I believe have started to cover en masse, creating a self-fulling cross-asset linkage across the world. Cash (USD) remains the only true safe haven.

My hypothesis is that (US) investors are waiting for the Fed decision (Wednesday) to reduce more, hoping not to miss the post-fed pop.  However, given the weak pre-Fed price action, consensus on yearly gains by market professionals and rally into the New Year, I believe markets have already priced in the best scenario. As such, reducing risk going forward is my position.

Fund-wise, I've dramatically reduced long exposure while maintaining the China-related (e.g. levered commodity company) shorts from last year. I still hold my highest conviction domestic longs, but believe there are better prices ahead.

Disclosure: reduced NEU, IBTX and sold out of HLSS to get cash.

Stay warm,

-Stanley