is a capital mistake to theorize before one has data. Insensibly, one
begins to twist fact to suit theories, instead of theories to suit
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 -
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...
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.
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.
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.
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
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.
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?
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.
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.
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.
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.
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
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
- 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.
- 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%.
-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
- 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