“The most incomprehensible thing about the world is that it is comprehensible.”
-Albert Einstein
I like to think that when Einstein wrote that, he was thinking about markets. In mathematics, complexity (or chaos) theory explains many of this world’s outputs through simple, repeatable, and underlying patterns. In hindsight, I guess this is why markets are always “comprehensible” by Wall Street’s finest revisionist historians.
Hindsight, of course, is always crystal clear. Unless the leaders of your organization don’t have any mirrors, you’re probably getting used to our 2009 investment Theme, “The New Reality”, taking hold at your office - transparency, accountability, and trust will be its new governors.
The leadership front is finally starting to get priority coverage in the financial media. President elect, Barack Obama, has inspired a bid this morning in the US futures after speaking to what has seemingly shocked the world in the form of a proactive plan that has a duration of 2 years rather than 2 days. There were also a couple of principles-based battles that emerged this weekend in corporate America’s boardroom. Both were long overdue.
The first was the most predictable – John Thain vs. Bank of America. The WSJ is reporting this morning that Thain is “struggling” with BAC’s management over paying himself a nifty $10M bonus. I expected nothing less of the Goldman alum. This one should be interesting to see play out.
The second was more inspiring – Lazard’s Bruce Wasserstein vs. Blackstone’s Steve Schwarzman. There is a fantastic Bloomberg article this morning comparing and contrasting the views of a levered long private equity man and why he shouldn’t have to mark his book to market versus the Brooklyn born banker’s concept of a transparency. Wasserstein knows a thing or two about private equity, folks – he owns private equity firm Wasserstein and Co. The credibility of this man’s handshake matters. Stay tuned. The ‘You Tubes” are ready to roll.
One of the main investment strategies I have been rolling against consensus with is being long China. Now heads are starting to roll on those desks who stayed short the world’s most relevant economy. Whether you shorted it 4 days ago, or whether you shorted China 4 weeks ago, it’s starting to hurt. The Shanghai Stock index closed up another 3.6% overnight, taking its four day rally to +10.3%. Since the first week of November, China is +22%. The USA is down -13%. This morning the Chinese government is floating the idea of cutting personal tax rates. This is good.
Stocks in Hong Kong raged higher on whispers of American capitalist principles blowing on shore. The Hang Sang Index had a whopper of a day, closing up +8.7%. Some of the reactive market pundits are suggesting Asia was up because India cut interest rates this weekend. I find their math trivial however, as India’s Sensex flashed a negative divergence, underperforming the region in Asian trading. “Chindia” isn’t a word, and much to the chagrin of those who tried making it up, China and India are on two very different economic policy tracks.
I covered all of our Indian and Japanese short positions into Friday’s freak-out US market open. We have been short the IFN and EWJ etfs for the better part of 2008, but that doesn’t mean we have to be short them every day. Consistently making money on the short side is a mathematical exercise that should be managed very proactively. There is no such thing as a “long term capital gain” on the short side, so I don’t manage my duration that way.
Just because I covered India doesn’t mean that their economic issues cease to exist. While they plugged in a token $4B stimulus package this weekend, that was a good 2/3 light versus expectations. India’s yield curve has flat-lined, and their debt balances are beginning to balloon. This is not good folks. This is not “Chindia”. This is a problem, and we will look for strength as an opportunity to re-short this country-level risk.
Back in the USA, I was also doing a little holiday shopping on Friday (covering and buying). I had 9 consecutive buy/cover ideas in the virtual “Portfolio”, so I’ll refer you to that part of our portal for the details (www.researchedgellc.com). Importantly, I opened up our wallet and took our net allocation to US Equities up to 3% - I know, call me reckless! Our US Cash position was dropped back down to 65%, and I continued to add to our mounting position in Commodities, taking that exposure to 15%. China remains the dominant driver in our International Equities position of 18%. We’re not chasing the lemmings buying China high today – trust me.
You can trust me and my team’s investment process. I trust in America’s principles-based resolve. I am confident that we will, at some point, find the new leaders of both our political and economic process. The New Reality will be a wonderful one. While timing it to the day will be next to impossible to get right, we will be able to monitor this patient’s critical market factors daily. Like any complex system, the global market is a very dynamic one. “The most incomprehensible thing about the market is that it is comprehensible.”
Have a great week,
KM
Long ETFs
GLD -SPDR Gold Shares -- LME spot gold contracts rose over 2% in trading this morning.
OIL - iPath ETN Crude Oil – Light Sweet Crude near month contracts traded as high as 43.44 this morning after below 41.00 in late trading on Friday. Last week, OPEC president Khelil acknowledged that the group is considering enacting significant production cuts in their upcoming meeting.
EWG – iShares Germany - Stocks in Europe rallied, led by mining and oil shares, after U.S. President-elect Barack Obama pledged the largest infrastructure spending package since the 1950s. The DAX gained 257.21, or 5.89%, to 4639.56. DAX futures expiring this month rose 6.9 %. Audi AG (EWG: 13.6%) said deliveries rose 0.4% last month because of new models, with year-to-date sales advanced 3% to 920,700 vehicles.
EWH – iShares Hong Kong -- China Construction Bank Corp. led the nation's banking stocks higher in Hong Kong trading on speculation the Chinese government will lower an industry tax to ease pressure on their finances. The Hang Seng closed up 8.66% to 15,044.87.
FXI – iShares China – The CS1300 closed up 81.86, or 4.07%, to 2095.04. China’s Central Economic Work Conference, a three-day annual economic policy meeting, will start today and run through Dec. 10. The government may cut personal income tax to boost consumption and growth.
Short ETFs
SPY- S&P 500 Depository Receipts— CME futures traded above 897 this morning as a broad rally lifted European and Asian indices.
EWU – iShares United Kingdom – The FTSE is up 4.42% this morning to 4228.78. Royal Dutch Shell (EWU: 5.86%) gained 6.72%.
UUP – U.S. Dollar Index – The Euro rose to $1.29 USD this morning. The Pound traded higher to $1.49 from $1.47 USD.
FXY – CurrencyShares Japanese Yen Trust – The Nikkei closed up 5.20% to 8329.05 today. Mitsubishi UFJ Financial Group, Japan’s biggest bank, said it will raise about 400 billion yen ($4.3 billion) by selling common shares to boost capital.
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