"No one can possibly achieve any real and lasting success by being a conformist."
-J. Paul Getty
Remember all that Swining, Stressing, and Whining from early last week? I do - it was just one more of 2009's great opportunities to capitalize on what we have labeled as Glaring Groupthink.
As most of you know, I really like to make up names for things. I start writing this note at an un-Godly hour of the morning, and I guess part of it is finding a way to entertain myself. Now that my morning missive is beginning to find its way into broader distribution, it is fascinating to see things like The New Reality or The Great Recession pop into Wall Street's bloodlines. At the end of the day, Wall Street is proving to be just what it is - one giant meme machine.
Jean Paul Getty was one of Main Street's real-life oil men and his aforementioned quote, when considered here in 2009, needs an asterisk - and that's that anyone can achieve lasting success as a politician by being a conformist. Did anyone watch Arlen Specter backpedal on Meet The Press yesterday? Wow - solid session of You Tubing there.
Now that Paul Volcker has a Transparency/Accountability date on the calendar to actually walk Americans through what he sees on these compromised Streets of the US Financial System (May 20th), he is going to get some overdue airtime. The men and women of Research Edge thank Mr. Volcker for supporting our program - he is calling this, "The Great Recession."
As a result, the manic media can now officially shift their focus away from Roubini and the Depressionista theorists, and see the light. That is, the light that's been on. As in any Recession, however Great it may be... early cycle leading indicators begin to signal a recovery. The signals that I focus on most are grounded in marked-to-market prices. Since late February, these prices have been as crystal clear as the sun rising in the east.
To review the fundamentals:
1. Chinese growth accelerated from the Q408' cyclical lows (all of Asia and the manic media covering it is going gaga over China printing an expansionary PMI number for April last night - Chinese stocks closed up another +3.3% at 40.6% YTD).
2. ASEAN countries (Southeast Asia) have adopted a $120B currency reserve fund (the Chinese replacement rhetoric for Yuan vs. the compromised US Dollar continues, and what's bad for the Buck, is great for REFLATION).
3. Breaking the Buck works, in the intermediate term (the US Dollar closed down again on a week over week basis last week, breaking down through TREND line support of 85.64 = REFLATION).
4. The Russians get paid when oil goes up (as the USD breaks down, oil is starting to breakout... oil was up for the 2nd week in a row last week and this morning Russian equities are tacking on another +2.2% to their YTD stock market gain of +34.7%)
5. The Saudis, The Canadians, The Australians, The Brazilians, etc... all get paid by either China or Petrodollars too (re-read points 1 and 4; The Client is China).
6. Credit markets look as good as they have looked in a year (as the credit mechanism is reinstated, capital starts to flow, and being long short interest becomes one of the best ideas an investor can have).
I'll stop at six relatively large factors that are A) Fundamental and B) Historical Facts, because if I broaden the note out to US Consumption being +2.2% in Q1 of 2009 or explain the fundamentals of the MEGA Squeeze in Consumer Discretionary stocks (Mortgage Rates, Employment, Gas Prices, Asset Prices), some people really get upset.
The New Reality remains that in a country that has lost the integrity of its Financial System and the validity of the handshakes by those leading it, that being a conformist of Wall Street consensus is starting to trade at a significant discount to even perceived wisdom.
With all of these fundamental realities in the rear view, expect consensus to morph into a liability again... at some point... but not yet. For now, we are still very early in Q2 and the hedge fund redemption cycle has the power of kicking in Part Deux of what I am now going to label the Sucker's Squeeze.
Hedge fund redemptions work both ways folks. I can assure you that those who missed the both crashes (on the way down and on the way up versus consensus expectations), will be forced to cover their illiquid short positions in the very near future.
There will be no "side pocket" or government bailout for unrealized losses on the short side. Unlike the crash on the way down, this recent one on the way up is going to highlight who the real Sucker's of Stress and Swine Tests really are.
In the immediate term, I have the SP500 overbought above the 883 line. I'll be back in the game buying short interest on the down moves using 860 in the S&P as my support.
Best of luck out there today,
KM
LONG ETFS
SPY - SPDR S&P 500-The SP500 is positive from both a TREND and TRADE perspective. Additionally, the market continues to make higher lows, which is a bullish indicator.
EWD - iShares Sweden-We bought Sweden on 4/30 with the etf down on the day and as a hedge against our Swiss short position. Sweden is up a healthy 15.3% YTD and has bullish fundamentals. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies.
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 resourcerich Vancouver should provide a positive catalyst for investors to get long the country.
XLE - SPDR Energy- Energy decidedly outperformed the market on 5/1, closing up 3.2%. We're long this sector and think it works higher if the Buck breaks down.
EWA - iShares Australia-EWA has a nice dividend yieldof 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
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.
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 $1.3268. The USD is up versus the Yen at 99.4750 and up versus the Pound at $1.4876 as of 6am today.
