"The game taught me the game."
-Jesse Livermore
As
you might imagine, I get a lot of emails throughout the day. Feedback
is greatly appreciated and I'd like to thank everyone who continues to
enrich our exclusive research network for their great questions.
In
this ever so globally interconnected market place of interacting
factors, I am a firm believer that collaboration wins. As my Partner,
Daryl Jones, reminded me yesterday, "in the long history of
humankind... those who learned to collaborate and improvise most
effectively have prevailed" (Darwin).
I
am on the road this week, but I have my trusty notebooks with me, and
the aforementioned 'Reminiscence of a Stock Operator' quote taped in
the insert of one of them. If you want to throw me off my game, steal
my notebooks - they help me proactively prepare and plan for my every
move.
I
was fortunate enough to first cut my teeth in this game in the
Baby-Bear market of 2000-2002. What we have here in 2008-2009 is much
more akin to Papa-Bear, and one has to sleep with one eye open to be
sure not to get mauled by him. While we made a decent Bear Market
trading call in the last few weeks, I will not mistake this for
anything other than what it was - a Trade.
One
of the better risk managers I learned from in this business used to
always say, "keep a trade a trade" - and as are most rules/patterns
that govern dynamic systems within the mathematical spheres of Chaos
Theory, that one is very simple. I don't make a habit of violating it.
Yesterday,
I sold into the proactively predictable follow through squeeze that Mr.
Market offered up to us, partly because I am human and I, like most,
fear missing large short term percentage gains... bear market rallies
tend to go too far too fast, however - history's lessons are crystal
clear on this front.
I
know, I know... a lot of people out there fancy themselves as
"investors for the long run", and I respect and appreciate that
strategy, provided that they are not buying SP +57% higher than
Monday's low, and selling 2009 consensus Bear Market fear (yesterday's
weekly II Investor Sentiment Survey showed only 26% of Institutional
money managers admitting they are bullish - bears were reported up
again at 47%!). In today's game at least, I consider "trading" the most
impactful risk management strategy one can employ. Talking about risk
management doesn't do you any good unless you act on it.
I
cut our Asset Allocation Model's US Equities position down from 24% on
Monday to 12% by yesterday's close. The SP500 is up +6.7% over the span
of the last 48 hours, and I think most people would be looked on pretty
kindly if that was their reported annual return for either 2008 or
2009... so I don't lose too much sleep in booking some of it. I am
still long the SP500 via the SPY etf, but I sold out of my position in
the Nasdaq (QQQQ) for a healthy gain.
For
the last 4 trading days, I have started off our Macro client 830AM
strategy call saying that the reward in being long the US stock market
was outstripping the risk. This morning, the immediate term Trade's
risk/reward is balanced for the SP500 at +3% upside versus -3%
downside. For the Nasdaq, the risk outstrips the reward by one percent
at -3% versus +2% upside.
If
you're looking for what my notebook says on critical support levels for
both the SP500 and the Nasdaq, I'm at 703 and 1329, on those broad
indices respectively. As the facts/math within this game changes, I
will. All the while, expect me to keep my feet moving out there - when
Bears are chasing you, standing still with a bucket full of fish in
your hands of positive Macro ETF gains is not what I recommend...
My
Asset Allocation to USD denominated Cash has been the beneficiary of
selling down US Equity exposure. I'm now back up to 69% Cash, and that
position makes me nervous. Why? well, because the one thing I hear most
frequently from my friends in the hedge fund community is how much Cash
they are in. That, as John McCain would say, "my friends" is consensus.
I
am from Thunder Bay, Ontario. Bears don't scare me - but consensus
does, to a fault. I guess that's a personal thing that I have to live
with. Jesse Livermore reminded us all that "the game does not change
and neither does human nature."
May the game continue to teach us the game, and God Bless this country's brave Bear Market Operators.
KM
LONG ETFS
EWA - iShares Australia-EWA
has a nice dividend yield of 7.54% on the trailing 12-months. With
interest rates at 3.25% (further room to stimulate) and a $26.5BN
stimulus package in place, plus a commodity based economy with
proximity to China's H1 reacceleration, there are a lot of ways to win
being long Australia.
USO - Oil Fund-
We bought oil on Friday (3/6) with the US dollar breaking down and the
S&P500 rallying to the upside. With declining contango in the
futures curve and evidence that OPEC cuts are beginning to work, we
believe the oil trade may have fundamental legs from this level.
SPY - SPDR S&P500- We bought the etf a smidgen early, yet the market indicated close to three standard deviation oversold.
CAF - Morgan Stanley China fund -
The Shanghai Stock Exchange is up +17.2% 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 on a down day. 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 2/26 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 up versus the USD at $1.2688.
The USD is down versus the Yen at 98.3480 and down versus the Pound at
$1.3834 as of 6am today.
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