• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

“It is a mistake to think businessmen are more immoral than politicians.”
-Keynes
 
To be clear, I am no Keynesian, but the man did have some great one-liners. I flagged this quote over the weekend while I was reviewing Amity Schlaes, “The Forgotten Man”, which is a historical interpretation of the Great Depression. The political climate in this country is intensifying, and I think there is plenty to glean from the behavioral psychology of political cycles past.
 
As always, the timing of points of view is critical. Keynes said this in the midst of Franklin D. Roosevelt’s most glaring attacks on corporate America in 1937. FDR needed the populist rhetoric to carry him into his second term, and although this helped him win that short term vote… in the end, the leftist anti-American capitalist tone was arguably one of the main contributors of the second round of crashing in the US stock market. Black Tuesday of 1937 was nasty, and so was the behavior of partisan politicians at that time.
 
Whether the name is Alex Rodriguez, Tom Daschle, or Dick Fuld – these are all one and the same – people who we lose faith in to do the right thing when no one is looking. This isn’t a Wall Street thing. This isn’t a Washington thing. This is an American thing – and the You Tubes of The New Reality are going to be keeping the score.
 
On that score, the new head of the US Treasury is off to a horrible start. Not only did Tim Geithner fib about his taxes, now he is failing to deliver on the market expectations that he has set. As Shakespeare wrote, “expectations are the root of all heartache,” and unfortunately Mr. Geithner was too busy being polarized by the politicization of his new seat to have done that required reading. This morning he is “delaying” the Treasury’s plan that he was slated to present. The S&P Futures don’t do delays Timmy. Let’s get with the program.
 
Geithner isn’t alone. Ben Bernanke may have lost his Goldman buddy, but he is sticking with the program of not delivering on expectations as well. The Fed is pushing out the long anticipated lending of the $200B TALF (term auction lending facility). These tax moneys were supposed to be flowing by February, and now it sounds like that won’t be until at least the end of February.
 
Michael Phelps smoked pot, and the partisan politicians in Washington didn’t get anything done this weekend. This is what these people are accountable for. If you’re surprised by it – find yourself a cold shower and a reality check. If you’re looking to endorse the “no drama” Obama dream as not having any asterisks, that’s a bid that I am glad to sell on strength…
 
On Friday, I made sales into the 863-873 resistance levels that I outlined in an intraday note to our clients. That’s not my politics – that’s my investment process. Whether or not it was a “good call” or not will be determined by the tape, and I will be held accountable for making that decision – as I should be. Them be the rules of The New Reality – transparency, accountability, and trust.
 
After charging +5.2% higher on the week into the face of consensus doubt, the balance of risk versus reward in the SP500’s price has moved to the risk side of the teeter-totter. I am using an upside target of 876 versus downside support of 844.
 
Combined with the US Dollar having its first down week of 2009, volatility coming down (as measured by the VIX Index) was another big contributor to the upward momentum in the US stock market. On a week over week basis, the VIX was down another -3% to 43.37, taking its cumulative swan dive from the peak of the Liquidity Crisis to -45%. That’s a big differential in expectations. The reality is that all of the 2007 bulls are now bearish, and the 2008 bears are busy writing books… so we are naturally going to see markets climb these walls of qualitative worry, expeditiously, as the quantitative measures go the other way.
 
This isn’t just a local phenomenon. Globally, stock markets in China and Brazil continue to hammer home the reality that countries who can earn unlevered returns can indeed prosper. Last night the Chinese stock market tacked on another +2%, taking the year-to-date move in the Shanghai Stock Exchange to +22.2%. On Friday, Brazil’s Bovespa charged another +4% higher, taking its 2009 score to +13.9%. While I sold our 6% position in Brazil into that strength, this doesn’t mean that I don’t like Brazil. It simply means that I like to book gains when I have them.
 
Some investors don’t have gains, some do. If you do have them, and you want to hold onto them for the “long run”, that’s really up to you. Until the US market can close above my almighty intermediate “Trend” line of 885, I’m much more into being a renter than an owner. There are plenty of shoes that have yet to be dropped in the land of the illiquid investor. There are plenty of assets that need to be marked to market that haven’t been.
 
Every asset has a time, a price, and embedded expectations. Just don’t mistake other people’s liabilities as an “asset” that you need to find a way to think about differently. A handshake can come from an American politician as soon as it can come from an American athlete – whether or not you should expect to trust those handshakes is really up to them. The You Tubes are on – before this stock market takes another leg up, it’s time for everyone to earn back America’s credibility.
 
Best of luck out there this week,
KM

 

Washington And Wall Street - etfs020909