"Forget about style; worry about results"
My Partner, Brian McGough, and I were driving home from Boston last night, and we had one of those great investment discussions that always just seem to happen when you don't expect them to.
For those of you who don't know McGough, the man is a virtual investment encyclopedia of everything that involves the consumer industry. Fully loaded with what the corporate bankruptcy cycle means for American companies playing Survivor, he's about as bullish as he has been on his sector in, I'd say, 3 years.
After doing meetings in New York earlier in the week, I was not expecting to have some of the discussions that I had with Boston based investors either. Some of these guys/gals are bullish and very much in a non-US centric way. My many thanks to all of the men and women of the Beanpot for having the privilege of your conversation.
Now, understanding that the market's direction has a funny way of changing people's tone on a real time basis (unlike Steve Schwarzman, most of these investors are marked-to-market), the reality is that our base of Boston clients were considerably more bullish than those I have recently spent time with in New York.
No, this isn't a comment on who is smarter. Don't forget that most of the guys I hang out with in Boston are hockey players - so, if anything, I'd err on the side of me and my Boston boys being quite a bit dumber than most. Maybe not seeing all of these fanciful probabilities of the perpetually beared up Depressionistas is beyond our mental grasp - but, we're cool with that.
The New Reality is this - the bears are writing books; the bulls are still too bearish; and the Boston Bruins have the momentum in the Stanley Cup Playoffs. Montreal's goalie, Carey Price, looked as rattled last night in that 4-2 loss to the Bruins as some of the short sellers of everything US Consumer and Financials.
No, I'm not long the Financials - but I am thanking God that the laws of objectivity had me cover all of my US Financials on the short side many percentages ago. While not participating on the upside here is something I have had wrong, I am still sincerely enjoying the shorts getting lit up like a Canadiens Christmas Tree out there right now on this market's proverbial ice.
You see, even some of the dumbest hockey players on the planet know that winning is associated with going to where the puck is going rather than staring at where it has been. Do I understand the Citigroup or US Consumer short case? You bet your Madoff I do - I was chirping about it, daily in these morning rants, from late 07' until late last year. Do I understand where the short interest pain trades are? You tell me - finding where the bears' exposures are isn't a trivial exercise for someone who has spent plenty of time sleeping with them.
Am I a raging bull? No (and I'm not a Boston Bruins fan either). But, on the margin, I have been as bullish as I have been in a long long time ... and as this market scales the well publicized bearish wall of worry thesis, I continue to get incrementally bullish data points that supports my positioning.
Two weeks ago today, I wrote a fairly aggressive intraday note titled "This Is BIG: US Employment Is Turning"... While it's always hard to qualify the emotional responses I sometimes receive when I make a controversial "call" like this, let me just say that the replies I received to that note would be the equivalent of my painting my body red and standing up at the Boston Garden last night yelling in French.
Now I may not be as "smart" as Mr. Hedge Fund Man out there who is running net neutral exposure, but 1. I can speak French and 2. I not stupid enough to do something like that at Hockey Night in Boston. After seeing yesterdays stiff drop off in US weekly jobless claims, I have to wonder what kind of Research Edge that America's favorite "hedgie" was using when implying to me that unemployment in this country was going to re-accelerate from those pre-Obama job creation days of February/March.
For those who still disagree with me that we have seen the peak in sequential unemployment growth, I'm cool with that - just understand that you are disagreeing with math, and you might want to keep the wizardry associated with your view on the down low. As the Captain of the Charlestown Chiefs said in Slapshot - "that's em-bah-rass-ing."
The New Reality here is that we are seeing the most expedited short squeeze in the history of the modern day US stock market. Sure, if you take me back to the 1880's in the data set I am sure you'll see a few more raging squeezes of consequence, but let's get serious here boys - unless you're as old as that guy they called Blue in Old School, you weren't trading back then anyway.
Who "trades"? Who "invests"? Who buys low? Who didn't buy anything at all and now wakes up every morning saying that we're "overbought"? I don't know. But I do know that there are some boys in Boston who have a big smile on their face right about now, and it's not just because the Bruins won last night.
My immediate term upside target in the SP500 is now 873. My downside support moves to a higher low at 843. Being a bullish Bruin works here - if it aint broke, don't fix it.
Have a great weekend,
EWZ - iShares Brazil- The Bovespa is up 22.6% 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 has managed its interest rate to promote stimulus. The Central Bank cut 150bps to 11.25% on 3/11 and likely will cut another 100bps when it next meets on April 29th. 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.
XLY - SPDR Consumer Discretionary-TRADE and TREND remain bullish for XLY. The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic. We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform. The XLY is a great way to play the early cycle thesis.
EWA - iShares Australia-EWA has a nice dividend yield of 7.54% on the trailing 12-months. With interest rates at 3.00% (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.
XLK - SPDR Technology - Technology looks positive on a TRADE and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last six+ weeks. As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (despite recent doubts about an IBM/JAVA deal being done). The other big near-term factors to watch will be 1Q09 earnings - which is typically the toughest for tech, along with 2Q09 guide. There are also preliminary signs that technology spending could be an early beneficiary of the stimulus plan.
TIP - iShares TIPS- The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%. We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
XLB - SPDR Materials -It's a bull on both a TREND and TRADE duration. The Materials sector is, obviously, a key beneficiary of our re-flation thesis. Domestically, materials equities should also benefit as the stimulus plan begins to move into action.
USO - Oil Fund-We bought oil on 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 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 Van.couver 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.
GLD - SPDR Gold-We bought more gold on 4/02. We believe gold will re-assert its bullish TREND as the yellow metal continues to be a hedge against future inflation expectations.
DVY - Dow Jones Select Dividend -We like DVY's high dividend yield of 5.85%.
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- 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.
EWU - iShares UK - We shorted the UK on 4/08. 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 as inflation has slowed considerably. GDP declined 1.5% in Q1, unemployment is on the rise, housing prices continue to fall, and the trade deficit continues to steepen month-over-month.
EWL - iShares Switzerland - We shorted Switzerland on 4/07 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.
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 $1.3079. The USD is up versus the Yen at 99.3800 and up versus the Pound at $1.4764 as of 6am today.
EWJ - iShares Japan -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".
XLP - SPDR Consumer Staples- Consumer Staples broke out of the TREND line resistance yesterday and is bullish as a TRADE. This group is low beta and won't perform like Tech and Basic Materials do on market up days. There is a lot of currency and demand risk embedded in the P&L's of some of the large consumer staple multi-nationals; particularly in Latin America, Europe, and Japan
"Forget about style; worry about results"