"What's right isn't always popular. What's popular isn't always right."
-Howard Cosell
Howard
also said "The ultimate victory in competition is derived from the
inner satisfaction of knowing that you have done your best and that you
have gotten the most out of what you had to give."
We
are in the midst of a global crisis, the magnitude of which has not
been seen in generations, and here at Research Edge, we are trying to
build a "New Reality" financial services firm; therefore we must give
everything we have to our clients, at all costs!
In
the past 12 months, Research Edge has grown from 3 employees to nearly
30, and not a single employee is sitting on his hands, we are giving
"it our all, at all costs...." This means (1) making calls and (2)
making calls that are not going to be popular, but are going to be
right.
As
the S&P was making new lows on March 9th we were increasing our
allocation to US equities, right in the face of consensus saying "it's
courageous to be buying when everyone is selling." On March 11, 2009,
the Research Edge sector view and Keith's "Dancing with the Shorts"
intimated the following - "Yesterday, the S&P 500 closed at 719.16,
up 6.4%; its biggest one-day gain since late-November. After
yesterday's move, 'The Battle of the Bulge' goes to the bulls, and
consistent with the Research Edge Macro intraday note 'Beta Shift'
note, 755 is next significant resistance level."
Yesterday,
the S&P closed at 750.74; the bear market rally is running out of
steam. As of the close last night we are up 4.5% month-to-date in our
virtual portfolio versus the S&P's 2% increase, and in our asset
allocation model, we have reduced our US equity exposure down to 4%.
Bear markets can be traded!
Also
on March 9th Nouriel Roubini was all over the press calling for 600 on
the S&P 500, as we were buying US equities. Since March 9th, the
S&P is up 11% and the financials have rallied 30%. Now Mr. Roubini
is saying that "Americans lived in a Bernie made-off and Ponzi bubble
for a decade or even longer." This is coming from a man who is
globetrotting around the world with the rich and famous, taking
helicopters when he does not want to sit in traffic. Who is living in
a bubble now? I would love to see an Intrade contract tracking Nouriel
Roubini's irrational exuberance!
Nouriel
Roubini is a side show to the Premier of China, Wen Jiabao. The number
one story on Bloomberg today says Wen is "worried" about China's
holdings of Treasuries and wants assurances that the investment is
safe. Of course the investment is safe! This guy is not dumb; this is
exactly what he should be saying. The Chinese have us with both hands
tied behind our back, and he knows it. President Obama needs to get to
China ASAP and make good with what should be our best friends. More
importantly, the Chinese are going to likely strong arm the
administration to "break the buck."
One
of the most important calls we have been making this year is based on
the relationship we see between stocks and the US Dollar, which we have
referred to as "breaking the buck!"
It's
been our contention that for most asset classes to re-flate in this
current environment, the dollar needs to weaken. Guess what the Chinese
want today? Wen wants the US$ to weaken to inflate assets
domestically, which will make US$ denominated debt more attractive to
foreigners.
The
current administration is relying on China to sustain its buying of
Treasures to fund billions spent on the economic-stimulus package.
Year-to-date, the Chinese have lost money on what they have bought so
far. I don't even need to look at the futures to guess they are
probably higher right now...
After
a strong performance in the S&P 500 this week, the Research Edge
immediate term Trade model shows -6% downside and only 1-3% upside. It
was not popular to be buying stocks on March 9th, but ironically, today
after a +11% move in the S&P in a week, more people feel better
about the market and are buying.
Function in disaster; finish in style.
Howard Penney
Managing Director
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. OPEC
announces on Sunday if it will cut production or not.
CAF - Morgan Stanley China fund -
The Shanghai Stock Exchange is up +16.9% 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%.
SHORT ETFS
EWW - iShares Mexico-
We're short Mexico due in part to the country's dependence on export
revenues from one monopolistic oil company, PEMEX. Mexican oil exports
contribute significantly to the country's total export revenue and
PEMEX pays a sizable percentage of taxes and royalties to the federal
government's budget. This relationship is unstable due to the
volatility of oil prices, the inability of PEMEX to pay down its debt,
and the fact that PEMEX's crude oil production has been in decline
since 2004 and is down 10% YTD. Additionally, the potential
geo-political risks associated with the burgeoning power of regional
drug lords signals that the country's economy is under serious duress.
IFN -The India Fund-
We have had a consistently negative bias on Indian equities since we
launched the firm early last year. We believe the growth story of
"Chindia" is dead. We contest that the Indian population, grappling
with rampant poverty, a class divide, and poor health and education
services, will not be able to sustain internal consumption levels
sufficient to meet targeted growth level. Other negative trends we've
followed include: the reversal of foreign investment, the decrease in
equity issuance, and a massive national deficit. Trade data for
February paints a grim picture with exports declining by 15.87% Y/Y and
imports sliding by 18.22%.
XLP -SPDR Consumer Staples- We re-shorted XLP yesterday as the market was cooling off its up move. XLP continues to perform terribly.
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
$1.2915. The USD is up versus the Yen at 98.2910 and down versus the
Pound at $1.4030 as of 6am today.