The Great Recession

"Depression is rage spread thin."
-George Santayana
 
 
Now that CNBC is running segments titled "Recession or Depression", and Bloomberg's #1 "Exclusive" story this morning is titled "Depression Dynamic Takes Hold...", what more evidence do we need? Aren't these two sources of reactive and revisionist editorials the great soothsayers of market prediction?
 
Of course not, that's silly ... more appropriately summarized, as Jon Stewart pointed out recently - if he only listened to CNBC in proactively preparing him for this downturn ahead of time, he would have a million dollars (provided that he started with $100 million)...
 
As the US stock market was hitting new cycle lows intraday on Friday, I started buying US equities more aggressively. I took our Asset Allocation Model Portfolio to 24% in the USA, and took down my cash position from 70% to 58%. As I was doing so, my inbox was brimming with about as many notes as I received in December of 2007 when I was shorting everything from Goldman to Bill Ackman's genius levered long position in "Tar-geh"...  some people didn't want to sell anything then, and those same people aren't allowed to buy anything now...
 
I am buying US Equities now, primarily because the early cycle economic indicators (China, oil, yield curve, etc...) are telling me that it is as safe now as it has been to do so since 2002... No, I don't call the daisy train at one of the aforementioned networks to get the ok on my view. The second reason to be buying here is actually turning into a very simple one - because I don't have a boss telling me I can't...
 
To be clear, I am buying American here for a Trade. While I appreciate that some investors don't trade, that won't stop me from doing what it is that I do. Investing for the "long run" or with the illiquidity factor associated with the super smart "Ackmanists" of the world may indeed sound legitimate, but at -24.3% for 2009 to-date may also leave a mark...
 
Unless you are 96% in cash (like I used to be), you probably should care about the immediate term "Trade" - in raging bear markets, these 1-3 day moves are much more powerful to the upside than in down ones. Maybe that's why for the YTD my Asset Allocation Model is only down -1.74% (no, being down is not good); we have stepped up and bought the market when no one is allowed to, then sold into the fire engine community who HAS to chase ...
 
Last week, the Asset Allocation Portfolio (no stocks, just ETFs) was -0.12% - the SP500 was down -7.0%. Under no circumstances was I proud to be down last week. My number one objective when I was running other people's money was always not to lose it. That remains the modus operandi with my family's capital, as it should.
 
Where all of these investment "styles" went wrong is fairly easy now to deduce, and I won't belabor those reasons or blame Obama for the capital destruction that has occurred. That would be both lame and depressing. The New Reality is that all of that is either behind us, or a waste time of time to rehash. Been there, done that...
 
What is most interesting to me now is to own the debate against the Depressionistas who are out there getting air time from the manic media. Like undisciplined children, it's time to give some of these people a "time out." The adults in the room can now take away the children's crackberries and handout some history books. Hate to break it to you little ones, we are now going to coin this The Great Recession...
 
Are recessions bad? You bet your Madoff they are... How about The Great One? Well, you can flip the channel onto the Money Honey and she'll definitely remind you that those ones are worse! But don't mistake this for a depression, and start sending out the "scary" chart of the day like penny stock Citigroup or whatever of the bucket shops out there who have a charting tool are doing - these are called marked to market price declines, not a Main Street American Depression...
 
Hopefully someone in the media gets why I am now understanding that what we have here is The Great Recession. While some people on Wall Street are rightly expressing their personal depression, they are wrongly straight-lining that statistically insignificant personal position across a globally interconnected economy. Fortunately, as the US Treasury Yield Curve, Dr. Copper, Wal-Mart, and China reminded me last week, Wall Street is no longer going to own the debate as to where this economy is headed next - the clients will. Some of them have blue collars... some of them are Chinese... I know, I know - very weird stuff I am talking about here...
 
Why I'm Not Depressed: It's all about the delta. The revisionists are straight-lining the record setting acceleration in unemployment into becoming a repeatable rate of growth - mathematically speaking at least, that's silly. Whether you want to look at this relative to the mid 1970's when year-over-year trough to peak unemployment last ramped this quickly (up 300-400 basis points year over year), or in terms of percentage accelerations across different durations, my conclusions are the same - the rate of growth in the US unemployment rate is setting up to SLOW... right as the manic media worries people about it most.
 
Is there downside left in the US stock market? Of course there is, but a lot less downside than what I was worried about in 2007 - -56% less actually...
 
My Partner Howard Penney gave me the day off writing Friday's note... but taking a step back to my Thursday Early Look note, I had downside support for the SP500 at 683 - that's where we closed the week... I know - man is that McCullough guy full of himself and lucky sometimes...
 
Well, I can tell you this... it's better being lucky than being Depressed.
 
Best of luck out there this week.

CURRENT ETF ALLOCATION

LONG ETFS

• EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months.  With interest rates at 3.25% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.
  
  
• USO - Oil Fund- We bought oil on Friday (3/6) with the US dollar breaking down and the S&P500 rallying to the upside. With declining contango in the futures curve and evidence that OPEC cuts are beginning to work, we believe the oil trade may have fundamental legs from this level.
  
  
• QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on 3/2 and again on Friday of last week.
  
  
• SPY - SPDR S&P500- We bought the etf perhaps a smidgen early with the S&P500 at 715, yet will take it at a discount.  The market is also close to three standard deviations oversold.
  
  
• CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +20.4% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.
  
  
• GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish trend.
  
  
• TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.
  
  
• DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
  
  
• VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.

• LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%
  
  
• SHY -iShares 1-3 Year Treasury Bonds- On 2/26 we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.
  
  
• UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.2619. The USD is up versus the Yen at 98.7420 and up versus the Pound at $1.3963 as of 6am today.