"One of the definitions of sanity is the ability to tell real from unreal. Soon we'll need a new definition."
Taking a few hours every day away from the screens and I-phones provides for a tremendous sanity check. While all of the said Captains of CYA Corporate America and God Save The US Government Inc. are managing this Great Recession reactively, the proactively prepared continue to differentiate themselves. As my wonderful wife Laura has taught me, "Keith, take a deep breath... and think about it..."
Thinking - ah, what an original concept. But who do we have in the seats that matter in this country who actually get this? Maybe a better question is does the American crackberry culture allow them to? President Obama claims to "get it", and we can have a long debate as to the accuracy of that claim... but there is no debate when it comes to the head of the United States Treasury - the man simply doesn't get it.
I know, I know - according to Obama and the resume builders, Timmy is "smart"... C'mon Man - if you ever get caught in the groupthink of New York City's high political society, you'll realize pretty quickly that being called "smart" is about as easy as calling a NYC cab.
The New Reality is that we live in a world choke full of "smart" people. Wall Street loves to call The Client "smart" - and they should - that's who pays them! Washington revels in the idea that people who write books are "smart", and no doubt they are - but the very books they start championing for policy are in fact lagging indicators. Not all "smart" people get it, when trying to proactively predict...
Timmy Geithner reminded us yesterday that, when it comes to understanding Global Macro, that he doesn't get it. When asked about Chinese currency policy at a Council of Foreign Relations appearance, all you have to do is YouTube what he said, then flip the channel to what he had to say later to C his A, and you'll get that.
The New Reality is that China is proving that, when it comes to understanding how interconnected global economy of colliding macro factors is, they get it. As embarrassing as Geithner's fumbling was yesterday was as impressive as China's Central Bank Governor was in clarifying. Governor Zhou simply stepped up overnight and reminded the world that China is the "stabilizing force" of a global economy that needs leadership.
China charged higher last night, closing up another +3%, and taking the return for Chinese Capitalists invested in their country's stock market to +30% for 2009 to-date. Does China have yahoos like Jimmy and Timmy plastered all over their mainstream media right now for their children to see? Do they issue the political rockstar status to government officials like Clinton and Greenspan so passionately embraced? Of course not. For now at least, these dudes get it.
The Russians are starting to get that being in bed with The Client has its perks. Russian equities are tacking on another +1% to their recent gains this morning, taking the RTS Index to +19% for the year-to-date, and +45% in the last 6 weeks!
Those who get that buying what China NEEDS versus what America's "smart" guys want them to need (US Financial Services and Bonds), are getting hugely compensated in terms of 2009 investment returns. Let's stop the texting and think about that slowly... what does The Client need?
1. Copper - after correcting for 48 hours has shot up another +5% this morning, taking its YTD price gains to +27%
2. Oil - after correcting for a day, has shot right back up to $54/barrel this morning, taking its YTD gains to +15%
3. Gold - trading up to +940/oz this morning remains one of the most glaringly obvious TRENDs in Global Macro, its +7% YTD
What doesn't China need?
1. US Financials - despite its squeezing of temples of the short selling community in the last few weeks, the XLF is still -26% YTD
2. US Treasuries - bonds continue to break down alongside the "safety TRADE", 2 and 10 year yields have shot up again this week
3. Tim Geithner, Hank Paulson, etc...
No one who is aware in this business would ever accuse the brain trust of Goldman Sachs of not getting it. In sharp contrast to the generic NYC groupthink "smart", these guys are actually Street smart. No matter how critical I have been about the risks embedded in their levered long machine since I shorted it in late 2007 (see mcmmacro.blogspot.com for the transparency check on that "call"), Goldman has once again successfully navigated the US political machine to their financial benefit.
From a societal responsibility standpoint, I'm not saying what they've done is right. But from a Darwinian perspective, GS is a survivor. I applaud their getting my note about NOT selling their Chinese handshake yesterday. Goldman turned around and announced shaking hands with The Client (Chinese bank, ICBC), and "reaffirmed" their "strategic cooperation" with China. Well done guys - well done.
Whether you like it or not, and whether they are a Goldman Partner, a Russian Oligarch, or a Chinese Communist (turned Capitalist), there are plenty of people in this global marketplace who are proactively preparing for the predictable behavior of those who don't get it.
My advice to President Obama - just stop... stop this circus that you are letting the world see YouTubed in America - pull Timmy in, and sit him down with some Global Macro people who actually get it.
I bought the QQQQ yesterday on the intraday selloff. I have been long US Tech via the XLK, and remain invested there. Never mind Bear-Only wanna be hedge fund manager Nouriel Roubini calling for a Depression. This is the Great Recession and you always get paid to invest in early cycle stocks (like semiconductors, oil, copper, etc...) before the cycle turns. Tech is now UP +2% for 2009 YTD. Those of us who are real-time risk managers obviously get that too...
Best of luck out there today,
QQQQ - PowerShares NASDAQ 100 - We bought QQQQ on Wednesday (3/25) on the pullback. We believe the NASDAQ has moved into a very bullish tradable range and is breaking out from an intermediate TREND perspective alongside the more Tech specific XLK etf.
EWZ - iShares Brazil- The Bovespa is up 11.3% YTD and continues to look positive on a TREND basis. President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil cut its benchmark interest rate 150bps to 11.25% on 3/11 and will likely cut again next month to spur growth. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme: as the USD breaks down global equities and commodity prices will inflate.
USO - Oil Fund- We bought oil on Wednesday (3/25) for a TRADE and are positive on the commodity from a TREND perspective. With the uptick of volatility in the contango, we're buying the curve with USO rather than the front month contract.
EWC - iShares Canada-We bought Canada on Friday (3/20) into the selloff. We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's socialist past, and believe next year's Olympics in gold-rich Vancouver should provide a positive catalyst for investors to get long the country.
DJP - iPath Dow Jones-AIG Commodity -With the USD breaking down we want to be long commodity re-flation. DJP broadens our asset class allocation beyond oil and gold.
XLK - SPDR Technology-Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last several weeks. Semiconductor stocks, which are early cycle, have provided numerous positive data points on the back of destocking in the channel and overall end demand appears to be stabilizing. Software earnings from ADBE and ORCL were less than toxic this week and point to a "less bad" environment. As the world stabilizes, M&A should pick up given cash rich balance sheets in this sector and an IBM/JAVA transaction may well prove the catalyst to get things going.
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.
GLD - SPDR Gold- We bought gold on a down day. We believe gold will re-find its bullish TREND.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
EWL - iShares Switzerland - We shorted Switzerland for a TRADE on an up move Wednesday (3/25) and believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials. Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.
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%.
EWJ - iShares Japan - Into the strength associated with the recent market squeeze, we re-shorted the Japanese equity market rally via EWJ. This is a tactical short; we expect the market there to pull back when reality sinks in over the coming weeks. Japan has experienced major GDP contraction-it dropped 3.2% in Q4 '08 on a quarterly basis, and we see no catalyst for growth to return this year. We believe the BOJ's recent program to provide $10 Billion in loans to repair banks' capital ratios and a plan to combat rising yields by buying treasuries are at best a "band aid".
EWU - iShares UK -The UK economy is in its deepest recession since WWII. We're bearish on the country because of a number of macro factors. From a monetary standpoint we believe the Central Bank has done "too little too late" to manage the interest rate and now it is running out of room to cut. The benchmark currently stands at 0.50% after a 50bps reduction on 3/5. While the Central Bank is printing money and buying government Treasuries to help capitalize its increasingly nationalized banks, the country has a considerable ways to go to attain its 2% inflation target. Unemployment is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.
DIA -Diamonds Trust-We shorted the DJIA on Friday (3/13) and Tuesday (3/24) and believe on a TRADE basis, the risk / reward for the market favors the downside.
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-Consumer Staples was the second best sector yesterday for the second day in a row. XLP has a positive TRADE and negative TREND duration.
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.
"One of the definitions of sanity is the ability to tell real from unreal. Soon we'll need a new definition."
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The Czech Republic’s ruling coalition toppled yesterday after Prime Minister Mirek Topolanek received a vote of no confidence in parliament. Topolanek’s coalition fell out of favor due to its inability to pass the reform it promised and to deliver leadership in the country’s economic slow-down.
The ousting of leadership in Eastern Europe is nothing new. Over the weekend Hungarian Prime Minister Ferenc Gyurcsany stepped down, proclaiming that if he can help to create a new government to address the country’s economic woes, then “this is how it has to be done,” and Latvia swore in a new PM with finance experience a few weeks ago.
The destruction and/or repositioning of individuals or governing coalitions throughout the region adds to the political destabilization of Eastern Europe, especially to outside investors peering in on a region that has multiple negative macro fundamentals piling up, many of which have been grossly highlighted by the media. While it’s net positive that governments are finally making the push to address their economic woes through new leadership, the decisions have come too late. Due to demand destruction within the Eurozone—the biggest market for most Eastern European countries—there is simply no market for their goods. This has reduced output, increased unemployment, and in turn sent bond yields soaring and credit ratings falling as investors expect a higher risk premium. The balance has sent GDPs tumbling further downward for this year and next.
The net of this development, which has seen budget and account deficits shoot up, has left many in the region with one option—look West, ie the EU and international organizations for aid. Today Romania received a $27 Billion bailout from the IMF and EU. The loan will help to reel in a budget deficit that was projected to hit 9% of GDP this year to ~4.5%. As a point of reference, the EU mandates that EU countries maintain an account deficit less than 3% of total GDP. Last year the IMF bailed out Latvia, Hungary, Serbia, Ukraine, and Belarus.
The good news for countries like Romania is that the IMF announced today that it will loosen the strings attached to its loans (like insisting on government spending cuts), double credit lines, and let governments borrow more up front. The new Flexible Credit Line credit facility may be aptly rolled out for the April 2 G20 summit and in response to the daily negative economic data points coming from regions like Eastern Europe.
In particular, the Baltic states look extremely troubled. Latvia’s economy shrank 10.3% in the last quarter, the EU’s worst decline, and is expected to fall to 15% this year. Lithuania’s economy is expected to fall 9% this year and its credit rating was cut yesterday by Standard & Poor’s to BBB from BBB+. Increasingly many argue that these currencies, which have kept fixed pegs to the Euro throughout the global financial crisis, need to either abandon and float them or reconfigure their pegs lower to be better in line with economic contraction. Latvia is the most indebted among Eastern European nations with external debt equivalent to 130% GDP according to data compiled by Brown Brothers Harriman & Co. The ratio for Estonia is 108% and 70% for Lithuania. The ‘Domino Effect,’ meaning if one Baltic state was allowed to fail, all would because their economies are highly correlated, is a serious concern for the EU.
The G20 Summit should give us more guidance on the state of Europe’s recovery, especially how Western Europe will deal with its own decline as it aids Eastern Europe. The IMF revised GDP to shrink 3.2% in the 16-Nation region. Germany, historically with the region’s strongest economy, is forecast by the Kiel Institute to decline 3.7% this year (or 6-7% by Commerzbank) and investor confidence out today shows sequential decline. Total euro-area exports fell 11% in January from the previous month, and the UK’s CPI reading of +3.2% in February Y/Y will challenge the country’s inflation target of 2%. The outlook is certainly bleak across the entire European board.
Yet Eastern European indices have been trading higher in March. Romania is UP +24.8%; Czech Republic +21.5; and Poland 12.7%; and Hungary +4.8%. YTD Romania is DOWN -18.5%; Hungary -12.8%; Poland -10.8%; and Czech Republic -9.3% and currency devaluation versus the Euro remains a real concern, especially with those loans denominated in Swiss Francs and Euros from western states.
We’ll continue to diagnose the Eastern European patient to determine if the March bounces in indices are simply trading off positive US economic news, or their own organic growth stories amid this global recession. Additionally we’ll be watching for European leaders at the G20 next week to address the Union’s response to economic recovery. At a pre- G20 summit in Brussels last week leaders insisted that the proposed €400 Billion for Eurozone recovery had to be given time to kick in. The issue of the European Presidency, which was expected to be held by Czech PM Topolanek till the end June, must surely come up now that he has been ousted. The Czech Republic may prove to be a destabilizing force on the Union due to the no confidence vote and acting Czech President Vaclav Klaus’s European Union skepticism.
Prime Minister Aso is hard at work on a third stimulus program as carmakers and electronics producers step up the pace of layoffs, but the truth is that there is little that the government can do now to fix the problems that Japan faces. As an export dependent economy which sells big ticket consumer products to wealthy European and North American markets, the Japanese are hostage to declining demand from their clients that can only be offset by a weakened Yen.
We have been short the Japanese equity market –and wrong, for the past week because we anticipated that the BOJ’s attempts to weaken the Yen through a treasury repurchase program would not stem the tide of Dollar-devaluation driven by the Fed’s own massive repurchase. Japanese public debt currently stands at 170% of GDP, so a 1.8 trillion Yen per month debt purchase by BOJ seems unlikely in the long term to protect yields or the currency as the government prepares additional stimulus measures that may easily add 15 to 20 trillion in debt issuance in this round alone.
We have also heavily discounted the impact of any increase in internal demand spurred by the BOJ’s bank loan program; which I see as essentially a margin-call-reset for underwater stock portfolios that cannot possibly convince Japanese consumers to stop hoarding savings to the extent that it will offset contracting external demand meaningfully.
The Yen has weakened against the dollar and we are now down by nearly -4% on our short as the Japanese equity markets are trading on a one factor basis, a factor which I was flat footed on tactically and which has cost us.
We continue to view the Japanese market negatively. After the “lost decade” another prolonged period of rising unemployment (and, critically, underemployment) will wreak further social havoc -keeping a lid on domestic consumption and leaving Japanese firms to wait for a rebound in US and EU spending.
Importantly, the competitive capacities of the ASEAN manufacturing centers (not to mention South Korea and Taiwan) seem better postured top participate in the growth of Chinese consumption. We continue to have a negative bias on the Japanese equity markets, but must trade it tactically. We remain short the Japanese etf, EWJ.
Today, the Commerce Department reported that new home sales nationwide rebounded by 4.7% in February after hitting a record low in January (the government also revised January's sales pace for new homes to 322,000 units, up from the 309,000). The February sales pace was still down 41.1% compared with February 2008.
We also saw a small improvement in Inventories of unsold homes as they fell by 2.9% to 330,000 in February; a 12.2 month supply given the current pace of sales. Last February, there was a 9.2-month supply of unsold homes. Given the potential for revisions, these government statistics require 3-5 months of data to establish trend line sales.
This statistic alone is not an affirmation of the bottom, so let’s look at the environment for signs of a potential recovery in housing:
(1) Overall affordability measures are the best in years
(2) Mortgage rates are at generational lows
(3) Mortgage applications are up significantly
(4) Significant government incentives
(5) Homebuilders are up significantly in the past two months
(6) Lower home prices
The last piece of the housing puzzle will be price. When consumers feel that the value of home prices have stopped going down, the incentive to buy improves dramatically. We believe the inflection point on price, as measured by the Case/Shiller index, will occur in 2Q09.
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