"To go beyond is as wrong as to fall short"
-Confucius
Suffice to say, there will be plenty of winners in The New Reality of proactive investing in 2009. Those who performed during the down move in February and then made the turn here in March/April have huge smiles on their faces this morning. As they should...
Wall Street loves asking "who made money"? And we're fired up to have some of this year's top performers as our clients. I'm already hearing of some fantastic performance starts to Q2 of 2009. As my Partner, Big Alberta Daryl Jones likes to say, "Crush, or be crushed!"
Yesterday was the eve of Obama's speech and month end - these were the two calendar catalysts that we warned the Depressionistas of, and no matter where you go this morning, there they are. We're about to lock in the best month for the SP500 since March of 2000. It will be very interesting to see how all of those Masters of The Quarterly Letter Writing Universe begin to revise their Q1 message to their clients.
Having spent the better part of my career on the buy side at various hedge funds, including my own, this is the way that the communication process works - realize your quarter end numbers in March - take a few weeks to make sure you have the numbers right - then write your accredited investors a revisionist letter that includes some form of an outlook that's based on new numbers (the current month) that you are staring at on your screens...
It's all rather silly really. Generally, there is nothing that's real-time about this quarterly letter writing process; particularly at firms that had a bad quarter. In some cases, disclosure is beyond selective. Selective Disclosure Depressionistas unfortunately cannot put losses on the short side into a "side pocket."
I will be fascinated to read the creativity writings of some hedge fund managers in explaining why they couldn't make money due to the "greatest challenges since the Great Depression" (a bipartisan message fully supported by Washington DC and every CEO in America who didn't do macro), but now can't make money on the long side either. I understand that some will say that "its just a macro short squeeze", but that's about as ridiculous a narrative fallacy as the Depressionista one.
The New Reality is that we are finally flushing out the overcapacity that we had built up in the hedge fund industry. This could be the toothpick industry, and any rational analyst would come to the same conclusion. Too much supply of a commodity ("smart money" with no Street smarts), ultimately results in capacity cuts.
Understanding that this has been a squeeze is one thing. Capitalizing on it is what people being paid 2 and 20 are hired to do. So to the men and women that Squeezy is
chomping on, no more whining and stressing ... or your investors will be giving you a "time out."
Who is winning out there this morning?
1. Obama - the stock market is up +29.1% since March 9th.
2. Obama - the stock market is up +25.3% since he called it a "bargain"
3. Obamerica - the worldwide majority who approves of him leading the USA
That's not a political comment. This is called the political wind. And it's blowing hard Left. As it blows, so will the Arlen Specter's and Stress Testers (see our note titled "The Specter of Arlen" at www.researchedgellc.com). I have been of the mindset that the stock market can actually keep winning if Obama socializes this country to smithereens. That doesn't sound good though, Keith. Good is as bad does folks, so get used to it. As we Break The Buck, stocks will REFLATE.
I know, it's a perverse relationship. And at a bare minimum, it doesn't sound Patriotic - but you know what? Neither do any of these cats you have compromising the integrity of the US Financial System. At the end of the day, its American Idol season, and the world has voted on Timmy Geithner and Kenny Lewis - DOLLAR DOWN!
DOLLAR DOWN = everything else that's asset based UP. Away from Obama lovers, who else is a winner as the Buck Breaks?
1. Americans (value of their 401k and Home stops going down)
2. Russians, Saudis, Canadians, etc... (yes, they like it when petrodollars reflate)
3. US Debt Holders (53% of this world's leverage is denominated in Greenbacks!)
So, as I finish up another of my morning diatribes, please have CNBC remind me that this is nothing but a "short squeeze", and that the 4 months prior was nothing but a "Great Depression." I'll keep on banging out prose with my arthritic hockey knuckles on this key board, reminding you that not everyone in this game needs to play with crutches. Winners will keep winning, and the losers will keep whining.
My immediate term upside target for the SP500 is now 880. I'll be making sales into fire engine chasing strength on the open.
Best of luck out there in May,
KM
LONG ETFS
EWC - iShares Canada- 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.
SPY - SPDR S&P 500-In the face of manic media hysteria, we have once again held onto higher lows. Positive TRADE and TREND.
XLE - SPDR Energy- Energy is breaking out on a TREND and TRADE duration. We're long this sector and think it works higher if the Buck breaks down.
CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package. To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.
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.
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.
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%.
SHORT ETFS
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 $1.3297. The USD is up versus the Yen at 97.8020 and down versus the Pound at $1.4846 as of 6am today.
XLP - SPDR Consumer Staples- Consumer Staples was overbought so we shorted more on 4/29. 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.