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"It is a capital mistake to theorize before one has data. Insensibly, one begins to twist fact to suit theories, instead of theories to suit facts."
-Sherlock Holmes



Sherlock Holmes is one of my favorite analysts, and I have that quote taped into the insert of my research notebook. Whenever I find myself reaching to be right, that simple reminder brings me back to where I need to be - data dependent.

At the beginning, end, and in between of my every day, no matter where I go... there real market prices are. If you make enough mistakes trading markets like I have, over time you come to respect this reality. Shaping one's thesis to what Nasim Taleb refers to as a "narrative fallacy" is something that anyone one in this business can do. However, if you don't have Warren Buffett's terms and duration (preferred and forever), your storytelling can quickly become problematic - especially when your client, boss, or Mr. Market, takes your capital away or, God forbid, marks it to market...

What people WANT to happen in markets, and what NEEDS to happen are often different things. Obama bashers wanted the man to make a call on the market, and be wrong - for a day at least, he wasn't. China short sellers wanted China's manufacturing growth to crash in 2009 - for the year-to-date, it hasn't. Chinese momentum chasers who were looking for their storytelling of "increased stimulus" to be confirmed last night didn't get that either.

In Asian trading last night, the trading impact of WANT vs. NEED was profound. I am long China via the CAF closed end fund - and for the life of me yesterday, I couldn't understand how anyone would be chasing this ticker into a +14% daily move with the thesis that China's Premier announcing another stimulus is a bullish thing? Stimulus is what floundering economies who are socializing themselves (Japan, USA, UK, etc...) are provided. If Wen Jiabao admitted to needing stimulus last night, I would be selling my entire position here on the open.

In order to achieve sustainably higher prices, what markets NEED is confidence. Confidence is what higher prices are built on, not government supports and stimulus. If you disagree with that, check the math on the USA SP500 price of 696, fully loaded with everyone in the manic media and their brother WANTING bailout moneys.

Overnight, despite not delivering on the manic media's WANT for Chinese stimulus, the Shanghai Stock Exchange had another great day, closing up +1% at 2,221. Now isn't that interesting... a country that is spending what they NEED rather than what the crackberry crowd WANTS. While I think estimates for 8% GDP growth in China are too aggressive, I don't think you can show me any point in American economic history where GDP was growing in the mid to high single digits and the US Government bowed down to populist cries for free stimulus moneys on the order of half a TRILLION dollars...

The New Reality is this. China's opportunity in the 21st century is not unlike that of America's in the 20th or Britain's in the 19th. Because their baseline of per capita GDP is so low, their long term opportunity is too hard for the bearish storytellers to comprehend. Ask the "hedgie", who was "short China" for that +14% move in the CAF, how he felt yesterday. I'm thinking that if his boss or investor got the memo on that accelerating Chinese PMI number, he was covering into the highs of the day - facts are hard to hide from.

Sherlock Holmes would be smiling. Isn't the data on those billion people still residing in China the same as it was when Investment Banking Inc. was long everything "Chindia" in 2007 still accurate? Or has some rogue from Parts Unknown killed off some of that demand and Beijing is making up the numbers on what their real headcount is?

Guys like Vikram Pandit, who built his hedge fund using "long India" as one of his big theories, are learning right now that the storytelling of a place called "Chindia" was fiction. The fact is that India got hammered again last night, losing another -2.9%, taking the Sensex Index to down -15% for 2009 to-date. Unlike China, India's currency (the rupee) looks like what it is, an emerging market currency with no-confidence on the offer. Unlike China, India could run negative GDP growth with positive mid single digit inflation. That would be bad - and that's what the marked to market prices of Indian equities having been telling you that your NEED to understand.

Despite rallies in China and Japan, Korea was down modestly overnight. They have the worst performing currency in Asia right now - that's not new. What is new is that when you pile their leverage issues on top of an accelerating cost of global capital (bond market's are breaking down), things can go from really bad, to toxic... in a hurry.

Korea is not China, and neither is Hong Kong. Despite the Chinese telling us that all is well, the Hang Seng index lost another -0.97% overnight - how could that be? Don't those who WANT everything that resembles China to go up NEED to get paid? Well, yes... they do... but that doesn't mean they will.

Hong Kong is not unlike Switzerland or Dubai for that matter right now. What these countries NEED is for the last 25 year cycle of cheap money and its high velocity of availability to continue. What the global market WANTS is to mark all of these countries and the companies operating within them to ditch their addiction to leverage (General Electric?). That's The New Reality.

Do I WANT the SP500 and Nasdaq to go higher this morning? Of course, I am long both. Does the market NEED to go higher every day? Of course not...

Let's keep it real out there, and not "Insensibly, twist fact to suit theories, instead of theories to suit facts"...

In the immediate term, my upside/downside targets in the SP500 are balance at +4% and -4%, respectively (683 and 738).

Best of luck out there today.


CURRENT ETF ALLOCATION

LONG ETFS

  • QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on a down day on Monday.

  • SPY - SPDR S&P500- We bought the etf perhaps a smidgen early with the S&P500 at 715, yet will take it at a discount.  The market is also close to three standard deviations oversold.

  • CAF - Morgan Stanley China fund - The Shanghai Stock Exchange is up +22% for 2009 to-date. We're long China as a growth story, especially relative to other large economies. We believe the country's domestic appetite for raw materials will continue throughout 2009 as the country re-flates. From the initial stimulus package to cutting taxes, the Chinese have shown leadership and a proactive response to the credit crisis.

  • GLD - SPDR Gold- We bought gold last Thursday with the S&P500 in the red and gold down. We believe gold will re-find its bullish trend.

  • TIP - iShares TIPS- The U.S. government will have to continue to sell Treasuries at record levels to fund domestic stimulus programs. The Chinese will continue to be the largest buyer of U.S. Treasuries, albeit at a price.  The implication being that terms will have to be more compelling for foreign funders of U.S. debt, which is why long term rates are trending upwards. This is negative for both Treasuries and corporate bonds.

  • DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.

  • VYM - Vanguard High Dividend Yield -VYM yields a healthy 4.31%, and tracks the FTSE/High Dividend Yield Index which is a benchmark of stocks issued by US companies that pay dividends that are higher than average.
SHORT ETFS
  • LQD -iShares Corporate Bonds- Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.

  • SHY -iShares 1-3 Year Treasury Bonds- On Thursday of last week we witnessed 2-Year Treasuries climb 10 bps to 1.09%. Anywhere north of +0.97% moves the bonds that trade on those yields into a negative intermediate "Trend." If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yield is inversely correlated to bond price, so the rising yield is bearish for Treasuries.

  • UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. The Euro is down versus the USD at $1.2567. The USD is up versus the Yen at 99.4850 and up versus the Pound at $1.4144 as of 6am today.