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Swedish Fish, This Chart Is Not...

This is just another picture that reflects the massively relevant impact of global growth slowing in the face of a US Dollar appreciating.

Sweden’s economy is tied to commodities and global infrastructure – the WEF ranks them as the 4th most competitive economy. Yes, the Swedish Krona looks like it had quite a run alongside those 2 global investment "themes" since 2005 doesn't it!

Local CPI was reported today, a touch better than expectations. This stagflation tastes nothing like Swedish Fish.
KM

VIX and S&P500 quant setups look ominous here...

In the immediate term, my models have the Volatility (VIX) level testing 24.77, and the S&P500 headed to 1230.54.

This is the immediate term "Trade" as I see it right now. Remember, my price models reset every 90 minutes. As the facts change, I will.
KM
(picture courtesy of: http://www.robertcasumbal.com/blog/images/080207_bearish_beat_bullish_450px.jpg)
Insert Chart Description Here. 2 Sentences Maximum

Portfolio Strategy: I've Moved Back to 84% Cash

Sell High. Buy Low. This market is one to be rented, not owned.
KM

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Americans Have Not Marked Their Homes To Market, Yet...

June's lift in home sales looks like it was short lived. This morning's "Pending Home Sales" for the month of July came in at -3.2% vs. -1.5% expected. Unless homeowners mark their sale prices to market, they are going to be stuck with "marked to model" liabilities, much like Dick Fuld at Lehman is.

There are plenty of hedge fund managers pinging me that "housing has bottomed"... I definitely missed this "Trade" higher in the US Homebuilding stocks, but I am certainly not going to mistake my missing it for a "Trend".

Be careful chasing momentum stocks out there. They are starting to come down faster than they went up (see GOOG, POT, etc...).
KM

Germany's Trade Balance: Boring Is Good!

Below, Andrew Barber, and I have attached a chart of the rolling sequential changes in Germany's import/export trade data. The German economy continues to hold up better than bad.

I am long Germany via the EWG etf in the Hedgeye Portfolio. The conservative monetary policy of the Bundesbank allows me to sleep more soundly at night on a relative basis to country etf's like Japan, which I continue to short. Germany's EWG security also pays a handsome 9% dividend yield, which I'm happy to collect in economic times like this.

*Full Disclosure: I am also long EWG in my personal fund.
KM

Remember, Have A Process

In my perpetual search to find those who “get it” this year, I often find myself looking back to the sage guidance of my old favorites. Yesterday I called out Jack Bogle of Vanguard. Often I look to Warren Buffett, Paul Volcker, and Larry Summers. This morning, I’d like to give some overdue keystroke time to Jeremy Grantham.

In Grantham’s “GMO Quarterly Letter” from July 2008, he highlighted marking assets to market, bailouts and accountability: “Marked to market 6 months ago, Bear Stearns and Lehman were bankrupt as are Fannie and Freddie today. The bailouts are really providing what amounts to capital to insolvent firms… These bailouts permit a shameful lack of accountability for reckless behavior”.

Compare this proactively prepared point of view to Hank Paulson comments yesterday: "We did not sit down and figure this out with a calculator," Paulson told consensus network, CNBC, “This is about our financial markets, confidence in our financial markets." You see, there is a big difference between reactive risk management and proactive prediction of possible risks. I have never met Mr. Paulson, but many of his former teammates tell me he is a good man. I don’t doubt that. That’s not the point. The point is that I don’t think he has a process.

Our investment process here at Research Edge is to combine bottoms up company findings with a global risk management process that perpetually considers tail risks alongside probable outcomes. One of the main risks to the US Financial system remains Asian growth slowing. Now that China has lost 65% of its stock market value since the October highs, people are paying attention. In fact, even Paulson’s ex/current colleagues at Goldman Sachs are starting to see reality on this front. This morning Goldman is downgrading the Chinese bank stocks to “neutral” from “attractive”. China’s banks stocks are down 50% year to date, and I am not sure whose process outlined them as being “attractive” throughout the swan diving competition. I am not sure I care either – I just want to stay as far away from it as humanly possible.

As the S&P Futures were spiking 24 hours ago, a real risk manager should have been looking to sell. That’s what we did all day long in the ‘Hedgeye Portfolio’ yesterday, and we’ll do it again this morning, if given the green lights of opportunity. Most investment students know that there is a proven psychological pressure in investing called the “endowment effect”. This simply reflects the propensity for investors to overvalue what they own. As Richard Peterson points out in ‘Inside The Investor’s Brain’, “one’s emotional state modifies the strength of the endowment effect”… so, provided that you “get” that the US market remains in a negative “Trend” position, you should be able to take advantage of that emotional market signal, and sell strength…

The last people who are going to agree with me on this are those who have a one factor investment process called price. That’s what “momentum investors” do; they chase price – they don’t fade it. Fading the squeeze up in Japanese stocks yesterday was one of the moves I made in the ‘Portfolio’ (shorting EWJ). Another was selling my trading long position in Australia (EWA). This morning, Asian equity markets opened down across the board – Japan closed down -1.8% and Australia down -1.7%. This isn’t magic. This is a proactively managed process.

Across Asia, currencies and stocks got hammered again last night. This is not new. This remains the fundamental “Trend”. This is occurring because Asian cost of capital is increasing in the face of slowing growth. Indonesia led market decliners last night with another -3.9% down move. Remember that they raised rates last week? Taiwan lost another -3.6% overnight – this was one of the consensus plays on “Chinese growth” that even the Harvard Endowment loaded up on, remember? I do…

Remember the geopolitical issues in Pakistan and Thailand? This morning, ex inmate and squirrel hunter extraordinaire, Zardari, is prancing around as Pakistan’s new leader. In Thailand, Prime Minister Samak was forced to step down for receiving benefits for a cooking show! No, you cannot make this stuff up. It’s happening, and if your broker still has you choking on every “its global this time” Asian ETF, remember that these cesspools of risk are what they have always been!

Good luck out there today,
KM



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