"Fear grows in darkness; if you think there's a bogeyman around, turn on the light."
In 1939, Dorothy Thompson was called one of the two most influential women in the United States. Eleanor Roosevelt was the other - Thompson was a journalist, and had a proactive and objective research process that remains a far cry from what you see in the manic media today.
Much like the houses in American "foreclosure" that the housing bears perpetually moan about and/or the suggestion that one cannot be long China "because they make up the numbers", what you cannot see, is what seems to suck in the short selling community the most. "Fear grows in darkness", indeed...
This morning's swine flu "news" will move to where the manic media brings it. On Friday, I titled the Early Look "Glaring Groupthink", and today's US market open will reflect the clear and present danger of that. Some people who are scared of their own performance, should be ... and they'll be the first to be running for the exits.
Bertrand Russell said that "collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd." I am certain that the short sellers of everything US Financial Stress Test will be calling me names for NOT agreeing with everyone on CNBC that's telling them that its now the Swine Stress that is going to do us all in for good. Afterall, what else is a short seller of higher lows to do? I guess, just make something up and/or focus on something new...
Is swine flu bad? Of course it is... but is it worse than the expectations the media will create? Can the Swine Test end the mother of all US stock market short squeezes? Could it be that the iggy piggy bankers from Merrill are relieved, metaphorically, by the over 2 billion hogs that graze this earth's mud? Ah, shifting the focus away from the human pigs... wouldn't that be a story book ending to a narrative fallacy that continues to have the most inconvenient of truths.
The New Reality is that, "With the economy still weak, inflation stubbornly high and valuations no longer so favorable, we do not see further catalysts for upside in the market"... oh wait, that's not America's New Reality - that's UBS's reasoning for downgrading Mexico from their "Top Pick" to "Underweight" this morning...
You have to be kidding me right? In a world where even Russia is up +30% for 2009 to-date, the fine folks over at the Swiss Bank that's seeing more money run out their high net wealth barn than Elmer Fudd chasing his pigs had Mexico as their TOP PICK! Better get that recommendation off the sheets boys... and fast! Cuomo cometh!
Given their own aforementioned reasoning, the objective mind has to wonder why in God's good name that UBS would be allowed to call this a "Top Pick." Swine in reckless recommendation is probably what you should be really worried about this morning folks - we're playing with live ammo here...
But enough about Wall Street's pigs, back to what to do with your money this morning. As we approached my upside SP500 target intraday on Friday, I proactively managed risk and sold down 5% of my US equity exposure. I tend to get a lot of questions about why I am not more invested these days, and while I tend to get those questions after market up moves rather than on down ones, I think those questions are very much fair. My personal reality is that I want to have a positive absolute return for both the 2008 and 2009 investment seasons, so I am ultra conservative with where I invest my cash, and more importantly, when.
Understanding that the "when" is where the Street tends to struggle the most, we all know how that narrative fallacy has been built up over the years - the pundits have been potty trained to tell America at large that market timing is impossible.
Timing the Swine Stress may be impossible, but understanding the daily risk/reward in the US market place is not. Every morning I wake up to new risks. Every morning I have to re-adjust my positioning for those risks. I may be not always be really right, but in using this proactive investment process I am rarely really wrong.
Being really wrong would be running max long exposure to US Equities for this morning's open or on last Tuesday for that matter. Remember that -4.3% bombing out of your book from 4/21? I'll assure you that some of the Depressionista short sellers do - if they pressed those lows, they were also really wrong. My call this morning is that pressing the Swine Stress lows will ultimately result in the same inconvenient outcome.
Fully loaded with the pigs, hogs, and swine from Mexico to Bank of America's Board room, this morning my risk/reward setup for the SP500 is as follows: Downside Risk -4% to 829, and Upside Reward +1% to 876. There is an important immediate term momentum line at 852 that will govern how expeditious Glaring Groupthink gets washed into expectations, so if you're looking for line to manage your risk around this morning, use that one.
Otherwise, best of luck out there today, and "if you think there's a bogeyman around" out there on a CNBC market open, just "turn on the light."
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.
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%.
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 down versus the USD at $1.3150. The USD is down versus the Yen at 96.6000 and up versus the Pound at $1.4558 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 greatly underperformed the market on 4/24. 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.