This note was originally published at 8am on March 18, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The bureaucrats do not understand the quasi-automatic system of the market.”
If you are bullish on Big Government Bureaucrats intervening in free markets, this morning is going to put a gigantic smile on your face. Overnight, the overlords of the G-7 intervened in currency markets in a way like they haven’t in over a decade – Central Planners of the world unite!
To be crystal clear on my view of the US Equity market, in the last 48 hours I have called it a Short Covering Opportunity. That’s a lot different than saying “buy-de-dip” or “buy-the-crash.” I do not want any part of being grossly exposed to riding these Bureaucrat Bulls or the Japanese Government pushing their debt over the QUADRILLION mark this morning (that’s ¥1,010,000,000,000,000).
The aforementioned quote comes from page 109 of Henry Hazlitt’s classic risk management book “Economics In One Lesson.” I’ve cited Hazlitt in 3 of our 5 Early Look notes this week because I think we need to get back to basics. Hazlitt wrote this book in 1946 and I suggest the talking heads of the Keynesian Kingdom take the time to read it. It’s time to get out of your textbooks boys and wake up to how bid-ask spreads work in the real world.
Not only do bureaucrats in the G-7 like US Treasury Secretary Geithner not get how Global Macro markets have become increasingly interconnected since 1946, they Perpetuate The Price Volatility in global markets by intervening in them.
“… they are always disturbed by it… they are always trying to improve it or correct it, usually in the interests of some wailing pressure group.”
-Henry Hazlitt (1946)
Now I don’t think it’s fair to lop everyone who has been bullish on Global Equity markets since the beginning of the year into a big bucket of being bullish on bureaucrats. I’m pretty sure most of our clients wouldn’t let a government person touch the P&L of their assets under management with a ten-foot Madoff pole. But they do try to front-run what these central planners are going to try next – that’s smart.
What’s not smart is being Timmy… sitting there in Washington’s “markets room” not thinking he is being gamed…
The problem with this global game of Gaming The Government is that it super-imposes massive correlation-risk into our markets. There is no greater impact a Fiat Fool in DC can have on global currency, commodity, and equity markets than by intervening in some way, shape, or form in the US Dollar. Almost everything that matters trades either in US Dollars or relative to a basket of US Dollars – both are burning.
Rather than confusing Geithner’s political skills with market ignorance, let’s run through some correlation math for his “markets” guys:
Don’t worry Timmy, I’m not geek-ing out on you and diving deep into the tapestry of my multi-factor, multi-duration, model that’s built on the principles of Chaos and Complexity Theory. I’m keeping this point very simple so that the next time you look into the camera under oath you can improve upon your storytelling performance. The Chinese are watching.
If The Bernank absolves himself from all accountability pertaining to America’s Burning Buck, and Timmy wouldn’t know a strong US Dollar policy if it smacked him upside the head like a Chinese 50bps rate hike this morning, who on God’s good centrally planned earth is going to get this right?
Suffice it to say, I think you could win the Presidency of the United States of America by explaining that burning our currency at the stake and perpetually intervening in our markets is bad – very bad – for the long term prosperity of the American people.
That’s all I have to say about that…
What am I going to do about this frightening level of blind faith in Big Government Intervention this morning? I’m going to sell and raise my asset allocation to CASH again. I have no patience for this. I don’t trust these people. And I refuse to put my family and firm in the palm of their centrally planned hands.
Like I said, there are still plenty a stock market bull that is not a Bureaucrat Bull, and the bears are chasing them down too. For 2011 YTD, the average and median percentage change in the 65 global equity markets and nine S&P sectors we track has been (-1.3%) and (-1.1%), respectively. Only 38% of countries currently register a positive gain. I know – “bull market”…
What would get me bullish on US Equities?
And, yes, I get it. That’s what I want for me. And the market doesn’t care about me. So while the Keynesian Kingdom of 1970s ghosts past move towards planning for Quantitative Guessing Part III, the best I can do is trade these markets with the Price Volatility these bureaucrats perpetuate.
My immediate-term support and resistance lines for WTI crude oil are $96.92 and $103.01, respectively. My immediate-term support and resistance lines for the SP500 are now 1254 and 1295, respectively.
Have a great weekend and best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – March 23, 2011
Despite a 16.9 % drop in the VIX over the past week, Egypt, Ireland and Portugal are vivid reminders today that the sovereign debt and geo-political risks are not going away. As we look at today’s set up for the S&P 500, the range is 33 points or -1.30% downside to 1277 and +1.25% upside to 1310.
MACRO DATA POINTS:
TODAY’S WHAT TO WATCH:
The only two sectors that are positive on both TRADE and TREND are Energy and Consumer Staples.
CREDIT/ECONOMIC MARKET LOOK:
Treasuries were mostly weaker for a fourth-straight session, though the long-end outperformed.
COMMODITY HEADLINES FROM BLOOMBERG:
European stocks are higher, led by Austria and the Netherlands. Egypt fell 8.97% to lowest level since May 2009, as trading resumes following two-month suspension.
BOE minutes; BOE voted 6-3 to hold rate in March, Dale and Weale voted for +25 bps raise, Sentance +50 bps.
Asian markets were stronger, with the exception of Japan and South Korea. Japan fell for first time in four days after levels of radioactive iodine unsafe for infants were reported in Tokyo.
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Conclusion: We’re short Chilean equities ahead of consensus coming around to our intermediate-term outlook for the slope of both Chilean domestic growth and global growth – negative.
While the sell-side runs around like a chicken with their heads cut off recommending buying everything Emerging Markets after they’ve been tagged for the last 3-6 months, we’ll stick to the script until it changes: Growth Slowing as Inflation Accelerates. Of course there will be plenty of buying opportunities once our call gets fully priced into global equity markets; for now, however, we don’t think consensus is in the area code of Bearish Enough.
Much like the US, Chile is one economy where consensus gets the “accelerating inflation” component of the thesis, which is highlighted by the Chilean Central Bank being the most hawkish in the world over the last year, raising rates +350bps in response to CPI accelerating from +0.3% YoY in Feb ’10 to +2.7% YoY in Feb ’11.
The central bank’s recent acceleration of rate increases (from +25bps to +50bps increments) actually caught 19 of 22 forecasting economists off guard, particularly given that they tightened in the face of Japan’s crisis despite Japan being Chile’s second-largest export market. Taking their cue from the central bank, consensus’ CPI forecasts for 2011 are on the rise of late:
Of course there may be a time over the next year(s) when increased Japanese demand for raw materials is bullish for Chilean Exports, but for now, we will avoid the rookie trap of Duration Mismatch and play the game in front of us, which is one of slowing growth. To be specific, we expect Chilean GDP growth to top out in 1Q and rollover substantially through the end of the year alongside waning global growth fueled by structurally lower levels of Chinese, European, and US demand. Difficult comparisons in 2H11 augment this view.
Lastly, Chilean equities remain broken from a TRADE & TREND perspective and today’s rally up to another lower-high coincidentally closed just under our immediate-term TRADE line of resistance – a ripe shorting opportunity indeed.
Positions in Europe: Short Italy (EWI); Short Spain (EWP)
As an update to our research note on 3/16 titled “Portugal Shakes on Debt Dues”, today we heard from Portugal’s PM Minister Jose Socrates that he increasingly believes that the main opposition party (the centre-right Social Democrats) are not willing to agree with his additional austerity programs to further trim the country’s budget deficit at tomorrow’s parliamentary vote. Socrates has previously announced that if the plan is rejected he would likely resign.
Should austerity be voted down tomorrow and Socrates call his resignation, which is looking increasingly probable, we’d expect the political indecision to heighten the need for and shorten the duration of a bailout from the European Financial Stability Facility (EFSF) to help shore up a hefty schedule of sovereign debt coming due over the next months (see chart below).
Socrates and his minority Socialist party’s new austerity plans aim to control operational and administrative expenses in the public sector. Given that the government on Monday recognized that annual GDP in 2011 will be -0.9%, versus a previous estimate of +0.2%, the government’s deficit reduction program over the next three years looks increasingly overly “optimistic”, as negative growth will further impair revenues need to pay down its deficits. The government’s budget deficit plan is: from 9.3% of GDP in 2009 to 7.3% in 2010, 4.6% in 2011, and to the EU limit of 3% in 2012.
If Socrates were to resign, a general election would follow; given the country’s constitution snap elections could be held at the earliest 55 days after called.
Tomorrow could well be another volatile day for Portugal and across European markets. Keep your head up.
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