As the sun was setting at Bay Hill in Orlando, Florida last night, one of America's finest leaders reminded us that winning is ultimately born out of adversity. After reconstructive knee surgery and a 16 foot birdie putt sinking on the 18th, Tiger Woods is already back with a PGA Tour win. Leaning on his bad knee, Woods didn't ask for a bailout of that 17th hole bunker - he's an American who proactively prepares - and man is he tough to beat!
Unfortunately, the young men on the Yale Hockey team weren't so fortunate, but they learned an important life lesson in Bridgeport, CT on Friday night - if you want to win at the highest level, you have to be playing at your best. That's what this globally interconnected marketplace is demanding from us every day - these markets wait for no one. Winners and losers emerge every day.
The US stock market has proven that risk managers and traders alike have had ample opportunity to prove themselves to their investors in the last 2 months. At +11% for March to-date, the SP500 is UP as much as it was DOWN in February. Who has the winning strategy that can earn an absolute return in both up and down markets? The YouTubes are on, and we will most certainly see...
Friday's US stock market weakness was mostly price driven. This is no surprise - this market trades on price, not valuation. On a day-over-day basis, volume was down -32% versus that which we saw trade into Thursday's 3-week highs. After a +23% trough-to-peak squeezing of the Depressionistas temples, there was (and continues to be) plenty of room for US stock prices to deflate. Inclusive of Friday's -2% loss, the SP500 is still up a very relevant +20.6% from its March 9th low of 676.
Where are we headed next? Lower. While the Nasdaq is still trading +3% above what I call the intermediate TREND line (I am long QQQQ), the SP500 failed to hold its head above hers (827). With the Dow (I am short DIA) and the US Financials (XLF) broken from a TREND perspective, Tech and Consumer Discretionary can only carry this market on their backs for so long.
We sold most of our Tech names in our virtual portfolio into Goldman getting amped up on the semis on Thursday. Some of what Rebecca Runkle calls "Tech Spec" was re-flating too expeditiously (Monster Worldwide (MWW), Red Hat (RHT), etc...), so we sold those as well. No, there are no rules against buying them back! While the XLK (Tech) is +3% for 2009 to-date, and we are still long the ETF in our Asset Allocation Portfolio, it's not going to be a winner every day. Everything has a time and a price.
There are 3 out of 9 sectors in the S&P that are bullish on both an immediate term TRADE and longer term TREND basis: Consumer Discretionary (XLY), Basic Materials (XLB), and Tech (XLK). No these aren't themes - these are quantifiable TRENDs that story tellers start to build investment themes around. The most obvious one that all of three of these sectors have in common is that they are what most investors recognize as "Early Cycle" stocks.
In this 2009 global market battle, being early is a heck of a lot better than being late. The old "event driven" momentum model of the levered long days has rendered the Fast Money strategy of buying high to "sell higha" somewhat useless. What we want to be doing here in a Bear market is simply buying low (early), and selling high (late). The strategy has been around for centuries, it's actually not that complicated.
What is complicated is understanding why President Obama let Timmy Geithner out of this room yesterday. On a busy market day, it's hard enough to trust his mug while it's on television, never mind when thought leaders in this country can actually take the time on a Sunday to listen to what this man is actually saying. I'll let the media get you up to speed on what he said specifically, but I can assure you of this - the world doesn't trust this guy as far as Rick Wagoner can throw him.
Away from Obama throwing out the embattled CEO of GM overnight, the global economic community seems perfectly happy to toss whatever they owned for a Bear market TRADE right back under the bus this morning. As Geithner moves to try selling Americans on "Cash for Trash", most of us are cool with tucking our very own hard earned cash under our beds and hoping that his days leading this country out of this financial mess are soon over...
Hope, of course, is not an investment process. Neither is betting against the true American leaders in this country, like Tiger Woods. In a world where everyone who won't exist without a bailout is whining for more easy money leverage - it's time to start looking in the mirror and focusing on winning without the foot wedge. Play by gentleman's rules and do whatever it is that you need to do to get that win on the tape - because no matter where you go out there today, there those marked-to-market scores will be.
Always be at your best - stay hedged - and always make your portfolio structure tough for Big Government to beat. My downside support levels for the SP500 are 801, then 760. Manage risk (or trade) around those levels proactively.
Best of luck out there fighting the good fight today,
RSX - Market Vectors Russia-The Russian macro fundamentals line up with our quantitative view on a TREND duration. Oil has benefited from the breakdown of the USD, which has buoyed the commodity levered economy. We're seeing the Ruble stabilize and are bullish Russia's decision to mark prices to market, which has allowed it to purge its ills earlier in the financial crisis cycle via a quicker decline in asset prices. Russia recognizes the important of THE client, China, and its oil agreement in February with China in return for a loan of $25 Billion will help recapitalize two of the country's important energy producers and suppliers.
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.
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 large government recent history, and believe next year's Olympics in resource 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-assert its bullish TREND.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
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 $1.3169. The USD is down versus the Yen at 96.7600 and up versus the Pound at $1.4119 as of 6am today.
XLI - SPDR Industrials- We shorted it on 3/26; industrials remain broken on a TREND basis.
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).
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 best sector on Friday (3/27), showing that low beta can actually work on a down day!
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.