The Year Of The Ox - asset allocation012609

"The Ox is the sign of prosperity through fortitude and hard work. This powerful sign is a born leader, being quite dependable and possessing an innate ability to achieve great things. As one might guess, such people are dependable, calm, and modest. Like their animal namesake, the Ox is unswervingly patient, tireless in their work, and capable of enduring any amount of hardship without complaint."
-Attributes Of The Ox (Wikipedia)
The best news in global macro this morning is that most Asian stock markets are closed for Chinese New Year. This means that the positive momentum that continues to build in the Shanghai Stock Exchange will live at least until next week when trading resumes, and the Asian markets that were under assault last week at least get a breather!
China's stock market is up almost +9% for 2009. This compares favorably with the SP500 which is down -7.9% year-to-date, and all other major stock markets around the world. With the TED spread narrowing, interest rates being cut to zero, and stimulus starting to flow, there is no longer the same "Liquidity Crisis" that global financial markets faced in the fall of 2008. Those, like the Chinese, who own the both the liquidity and duration of their own investments are in the catbird's seat to buy up assets from forced sellers.
What we have now is an "Illiquidity Crisis" that continues to assert itself where countries and companies alike need to meet their maker - the marked to market maker that is.  This, of course, goes hand in hand with the Crisis in Credibility that we have been harping on for the past while. If you said, thought, or assumed you could wait this out before The New Reality's rules of transparency and accountability revealed your illiquidity problem, your Depression may be as severe as Nouriel Roubini will remind everyone in Davos, Switzerland this week.
With most of Asia closed for the holiday, Japan was front center being 'You Tubed'. This socialized bureaucracy continues to perplex the "valuation" buyers, but as Marty Whitman says, "a bargain that remains a bargain... is no bargain." Japan closed down another -0.81% overnight at 7,682, taking it to -13.3% for 2009 to date, underperforming American stocks (ex horse and buggy whip US Financials) by a significant margin.
I have long been short Japan, and I see no fundamental catalyst that could sustain a rally in Japanese shares in sight. That said, everything has a price... and I will likely be booking another gain here on the short side in the near term. Re-short Japan on an up day, not a down one - rinse and repeat.
Although they we don't have to pull out the paddles yet, the global equity market patient (ex-China) is back in the emergency room. Make no mistake, the year to date performance of the US stock market has put many investors who don't own the duration of their investments behind the eight ball, and this will have an impact into month end later on this week.
In our Hedgeye Asset Allocation Model, I am down -1.34% for the year to date. Losing money is unacceptable. I do not blame the market - I look in the mirror, unlearn, and re-learn so that I can be flexible enough to get back to winning. Being long a 6% position in Gold helped offset losses in US Equity exposure last week. For the week, the model portfolio was down -0.21%.
In Russia, although stocks are trading up a hopeful +5.6% this morning, these guys are having a heck of a time re-learning any of history's lessons. When I re-read the attributes of the Ox, I think of the opposite force of nature in Siberia, or the office Hank Paulson is thankfully packing up this morning in Washington. Reactive, emotional, and wrong are quite different attributes than dependable, calm, and patient. History will write herself for Putin and Paulson alike - that you can lever up a long bet on. Although the Nikkei in Japan is still over 6% higher than its October 2008 low, the Russian Trading System Index is -4% below hers. Vladdy, the global equity and currency markets have voted.
In the intermediate term, Russia's failure and Paulson's exit are net positives for both American military and financial relevance in The New Reality. Although Tim Geithner is far from a comforting answer to everything that I'd rather forget, he is likely going to be confirmed by the Senate today as the new head of the US Treasury - so... we are all going to have to deal with him now - he will be held accountable by our You Tube.
Can Geithner pick up right where Hank "The Market Tank" blew up? For sure... that's probably why the US stock market is headed back to the emergency room - market participants are going to need to see what happens when we drop this guy in the dunk tank before he gets anyone's vote of confidence.
Confidence seems to be manifesting itself into the "re-flation" trade again. Last week, the CRB Commodities index outperformed the SP500 by a good 400 basis points after gold and oil put in +7% and +27% week over week moves, respectively. This was all the more impressive when you consider that commodities re-flated in the face of an appreciating US Dollar. This isn't supposed to happen - but neither is the US Treasury market ever supposed to go down.
The bubble in US Treasury Bonds is the last big one that remains. Can it pop? You tell me... there are plenty of expert bubble watchers out there these days who will surely chime in. The cost of long term capital shot up +30 basis points last week, taking 10 year US Treasury yields to 2.62%. This morning yields on the 10 year have moved 3 basis points higher yet again to 2.65%, and from a quantitative perspective, yields are starting to break out from the shark line we have been using at 2.34%.
Shark line? That's the line where the shorts get eaten. If you are short yield (long bonds), that's bad. We don't like being short the sharks - we prefer being long the ox. This situation needs to be monitored very closely, as the bond market is shaking. Don't forget that the Japanese and Chinese own us on this front - any material level of selling  down their respective exposures will require Obama, Volcker, and Summers to dress up like Ox this winter. "The Ox is the sign of prosperity through fortitude and hard work." The days of the quick crackberry fix are over - this is going to take time.
Best of luck out there this week.

The Year Of The Ox - etfs012609