"It is dangerous to be right in matters on which the established authorities are wrong."
I don't think American economic history has ever seen such a powerful level of groupthink in her financial markets. This, of course, is primarily a supply issue. In terms of participation, The New Reality is that there has never been more people willing to get in this game. Whether it's an oversupply of manic media, money management firms, or the 34 million plus online brokerage accounts in this country, no matter where you go this morning, there they all are...
Being in my seat provides an interesting vantage point. To get here, I drive through the "make money" mecca of Stamford in the wee hours of the morning and see that most of my sell side competition's lights are off. By the time I get to New Haven, my inbox is lit up like a Christmas tree with people who agree/disagree with my firm's points of view. While I don't spend my time with group-thinkers, I am privy to plenty enough of their thoughts. Short Starbucks, long McDonald's anyone?
Do I have baggage in this business? Don't we all?...
After having a great run being overly compensated in the hedge fund business, remember that I was basically fired at the end of October 2007 for being "too bearish"... so, pardon the pun, but I BEAR the cross of my own experience in not trusting the "established authorities" in this business. If it comes across as my having an axe to grind, I apologize for my inability to communicate - I'm grinding alright... grinding to be right.
So away from John Mack and "The Masters of Herd Island" that I went off on in yesterday's note, what are the most glaring groupthinker points of view I have staring at me from my notebooks this morning?
1. "we're overbought"
2. "the consumer is never going to be the same... its over..."
3. "earnings are going to kill the market, watch..."
4. "Ivy is bearish on housing, haven't' you looked at foreclosures"
5. "we're overbought"
6. "Meredith is saying this bank is going to... that will be a disaster"
7. "China really looks good now... this is how you should play it"
8. "Tech has moved to far too fast... its over..."
9. "we're overbought"
Are we overbought? Even Cramer went live with the Doug Kass call on that front last night. But are we really overbought or just getting ready to rip this line of groupthink up and into the right of into its final crescendo?
There is a big difference between stock market operators and stock market commentators. Most pundits, including those regulating US markets, say that market timing is not possible. In fact, on the Series 65 exam, you must check the box that says market timing is BAD, or you get the question wrong...
Understanding that not doing macro or not managing your market exposure around a macro call implies a massive amount of systemic risk in your portfolio is one thing. Understanding that the art of managing money is having a narrative fallacy of an investment process that provides you money to manage is completely another.
So what if you could be more right than you were wrong in calling markets? Would you use it? Is it any different than using the Master of Herd Island "one on one" approach to trading around a stock? Is the perceived edge associated with having sat across from a CEO in one of Wall Street's finest hotel conferences any different than understanding a mathematically relevant market correlation that begins to dominate?
The New Reality is that there is edge in understanding the behavioral side of markets and the glaring groupthink that's embedded therein. Next time someone tells you that we're "overbought", ask them at what price. Like the answers to the aforementioned 9 considerations, I am sure you'll find the specificity of the answer enlightening...
At the beginning of this week, I said China was overbought on the Goldman call - the Shanghai Composite Index closed down again last night, locking in her 1st down week in the last six. I'll say that, in the immediate term, that the SP500 will be overbought at the 874 line, and I'll refresh my risk management model every 90 minutes of trading so that my answer to the question changes as the cold hard facts do.
The "established authorities" aren't allowed to put these kind of a calls in print - making market calls isn't what they tell their clients they do, even though that's what they are doing more and more here every day...
Looks like great weather for a BBQ!
Have a great weekend with your families,
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 (and the game changing ORCL-JAVA deal). 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.
EWG - iShares Germany-We bullish German fundamentals, especially as a hedge against financially levered and poorly managed Switzerland. While the automotive industry is ailing, the strength of Germany's labor unions will preserve jobs and maintain a slower rate of sequential acceleration in unemployment. Compared to most of Western Europe, Germany has a positive trade balance and will benefit from Chinese demand, especially if the Euro can stay below $1.32. The ZEW index of investor and analyst expectations for economic activity within six months rose to +13 in April from -3.5 in March, the highest reading since June 2007. We're bullish on Chancellor Merkel's proposed Bad bank plan to clear toxic bank assets and believe the country will benefit from a likely ECB rate cut next month.
EWZ - iShares Brazil- Brazil 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.
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.
USO - Oil Fund-We bought more oil on 4/20 after a 9% intraday downward move. We 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.
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%.
VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. On 4/20 the VIX shot up 15.5% intraday, an overcorrection we want to be short as we believe US indices will make higher highs and the volatility is currently overbought.
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.
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 up versus the USD at $1.3292. The USD is down versus the Yen at 97.0800 and up versus the Pound at $1.4631 as of 6am today.
EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 4/22. 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-the government cut its forecast for the fiscal year to decline 3.3%, and we see no catalyst for growth to return this year. We believe the BOJ's 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 is breaking down through the TREND line again. 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.
"It is dangerous to be right in matters on which the established authorities are wrong."