Willfully Blind

"I hear and I forget. I see and I remember. I do and I understand."
-Confucius


When you proactively prepare for fundamentals to turn out a certain way, and they end up doing so... one of the hardest things to do in this business is sell on the news. Now that our calls on housing, employment, and Chinese demand are no longer contrarian, this is where my head is at.

Whether it was Ben Bernanke echoing Howard Penney's Q2 US Housing bottom call yesterday, or the People's Bank of China reminding the world overnight that China has "ample liquidity" to keep their stock market ripping to higher YTD highs (+42.4% after last night's close), it's all one and the same - it's consensus finally catching up with The New Reality. These things take time. These are the days of our lives...


Pardon the American soap opera one-liner there; God knows you heard enough of it yesterday with Bernanke testifying in Washington - but we road warriors of the Canadian Junior Hockey travel circuit are resident pros in watching Days of Our Lives, The Young And The Restless, etc... I know... its embarrassing...


While I could say that this morning's top read story on Bloomberg is embarrassing, I think I can only summarize it as being sad: "Bank of America Said to Need $34 Billion in New Capital After Stress Tests" is the headline and, as importantly, the underpinning of the story is based on "a person familiar with the situation" - or, in commoner speak, someone who has inside information.


Reminding you that Kenny Lewis' lack of a leadership spine or John Thain taking advantage of a conflicted US Financial system that he and his boys In De Club created isn't what is incrementally disheartening anymore - America has been there, and been ashamed of that. What's saddening, on the margin, is as sad does... and that's quite simply having learned nothing from what got us in this royal mess in the first place - the compromise of the American Financial system's credibility.


This, sadly, is not a New Reality. People have made millions trading on inside information in this country for generations. The only difference between today and 90 years ago is that now we have a manic media that perpetuates it, and a community of moral-less "money makers" who profit from the media's ignorance. It's sad...


The world's YouTube isn't as deaf as the US Government is willfully blind. The world issues a global vote on this revelation of American malfeasance daily, selling the one thing that the United States of America has left in terms of global financial leadership - the US Dollar.


In a perverse way, the output of all this has been very bullish for the short term TRADE in the US stock market. As the Dollar breaks down, stocks breakout. Anything that's based in Dollars REFLATES. Even CNBC has figured that out at this point.


Whenever you want to understand why the moral code of conduct can be rendered fuzzier than someone living in the land of nod might hope, just follow the money. Follow who gets paid, and how.


So, who gets paid if the Dollar breaks down?


1.       Americans, via the value of their home and/or 401k
2.       Russians, Saudis, Canadians, etc. - anyone who is paid in petrodollars
3.       Debtors - over 53% of the world's debt is held in bucks


So when someone whines and stresses about these things that anyone operating professionally in global markets has always known to be the way that it is, tell them to wake up and smell the coffee - from Wall Street to Washington, the compromised of De Club have been highly compensated to "hear and forget"...


In the IMMEDIATE term, while "I see and I remember" and " I do and I understand", all I can really do is be aware of the game that I have willfully chosen to play in. I am aware that the rules of this game are made up as we go along. I am aware of who gets paid for being willfully blind.


In the IMMEDIATE term, I am cautious about "getting longer of" US stocks, because at the 911 resistance line of the SP500 I can proactively predict that I will be sending a note out to my clients that I will be a seller.


In the INTERMEDIATE term, do I think that we can continue to see higher lows and higher highs in the US stock market? For sure, particularly if our compromising the trust embedded in this country's handshake equates to lower lows in the US Dollar. That's just how REFLATION works.


In the LONG term, however, if we all don't stop what it is that the world is seeing us do here, the US Financial System will be dead.


Best of luck out there today,
KM  


 
LONG ETFS  

VXX - iPath VIX- The VIX is inversely correlated to the performance of US stock markets. For a TRADE we bought some of the Street's emotion on 5/4, getting long their fear of being squeezed.


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.


GLD - SPDR Gold-We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  

DVY - Dow Jones Select Dividend-We like DVY's high dividend yield of 5.85%.

SHORT ETFS


EWW - iShares Mexico- We're short Mexico due in part to the media's manic Swine flu fear. The etf was up 7% on 5/4, giving us a great entry point.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.


DIA  - Diamonds Trust- We shorted the Dow on 5/4 for a TRADE. Everything has a time and price. 


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%.  

EWL - iShares Switzerland - We 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.