Term Sheet

The latest on private equity, M&A, deals and movements — from Wall Street to Silicon Valley

Why I moved my portfolio to cash

June 26, 2012: 11:00 AM ET

This story we're following on a daily basis won't end well.

By Keith R. McCullough, Hedgeye

FORTUNE -- I'm a storyteller. So are you. We tell ourselves, our families, and firms stories every day. We tend to frame each story within the framework of how we think. How we think drives our decision making. In the end, we are all accountable for those decisions.

I made a decision to go to 100% Cash in the Hedgeye Asset Allocation Model last week. That was a first. If you've been reading my rants for the last five years, I don't have to explain why at this point. You know where I stand. I do not think that this ends well.

Some people think it will end just fine. Some people think doing more and more of what has not worked is the only way out. Many people thought the very same thing in 2008, and their homes are still underwater.

The old way of doing business on Wall Street used to be about Bulls versus Bears. Some people believe that they are always bullish and some prefer to believe that they are always bearish. That doesn't make a lot of sense, does it?

MORE: Will the Fed's Twist get banks to lend?

I have by no means perfected the risk management process. The day that you think you have is the day you are about to get clocked. The plan is always grounded in uncertainty. The plan is always being prepared for what lies ahead. As the market changes, the process of managing risk and making money evolves. Sometimes as part of that plan, you need to take your chips off the table and step aside.

To review why I went to 100% cash:

-I had no idea what Ben Bernanke and the Federal Reserve were going to announce at the FOMC meeting.

-If Bernanke delivered another round of quantitative easing, food/energy inflation would have slowed real growth further.

-If Bernanke did not deliver another round of quantitative easing, a world full of correlation risk comes into play.

In other words:

A)     You cannot beg for easing and have accelerating growth at the same time – the world needs growth, not more debt.

B)      If you do not get easing, the US Dollar stops getting clobbered and commodity bubbles continue to pop.

So that's why last Wednesday, I had a 0% asset allocation to stocks and commodities. Why I had a 0% asset allocation to currencies and fixed income is simply because I know how to manage my immediate-term risk.

Get policy right and you'll get the US Dollar right. Get the US Dollar right (correlation), and you'll get a lot of other market things right. We've been right 32 out of 33 times since firm inception (2008) on the US Dollar. That's probably why I haven't spent the last 5 years trying to get back to a bull market top break-even. I may be wrong this time. If I am, I'll at least know why.

European central planning storytellers have played their hands. In my own accounts, with 100% liquid cash (and illiquid Hedgeye stock), I'm holding a hand of kings. For their last no-volume hurrah, the pro-quantitative easing crowd better hope he has 4 aces.

Posted in:
Join the Conversation
About This Author
Hedgeye

Hedgeye, a real-time investment research firm founded in 2008 by former Carlyle-Blue Wave portfolio manager Keith McCullough, operates as a virtual hedge fund. Staffed by research analysts from across Wall Street, Hedgeye offers fundamental, macro and sector analysis, present picks in a transparent way to its clients. It has built a stable of subscribers, which includes hedge funds and mutual funds, and recently launched a retail investor product.

Email Hedgeye
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.