Beta Shifting - Down

"Chasing Performance is like driving while looking into a rear view mirror."
-Andrew Barber
 
Over the past week, a number of our Research Edge Macro musings have suggested that the data points being released on housing and jobs is like looking into the rear view mirror.  If you are just waking up to the good news today, after a +36% move in the SP500, it's already over. 
 
We are now preparing for the next 3-month move, not reacting to what is being released today.  In the halls of Research Edge, this Friday has become a pivotal day as it culminates the consensus thinking on three macro data points.
 
Two of the data points: retail sales and the results of the stress tests, will be out shortly.  The odds are that we will hear from the nation's retail companies that April same store sales benefited from the Easter shift, warmer weather and a bounce in consumer confidence.  In addition, we will get the official stress test results, most of which have been leaked to the market any way.  With the Financials (XLF) being the best performing sector over the past month, up 22%, is it any surprise that that we will see anything but a "reassuring"?
     
The third key data point is tomorrow's monthly jobs report.  Any potential concerns about Friday's jobs report evaporated when the ADP employment report was released yesterday.  This set a clear positive tone for the market yesterday and looks to me like more than a few people were chasing performance.
 
The "good news" has propelled the S&P 500 to 919 and prompted us to take the proactive step as risk managers to lower the beta of our virtual portfolio.  Yesterday, we sold some of our high beta, small illiquid small caps companies and on May 5th we bought gold and select Healthcare companies as part of this safety trade.  Right now the Research Edge quantitative models suggest that the market could selloff to 881 if good news isn't as good news gets anymore. 
 
On Tuesday of this week, there was a BIG positive divergence in the "safety trade" just as the Research Edge quantitative models flashed that every sector in the S&P 500 was positive from a TRADE and TREND perspective.  Yesterday, with the Financials and Energy outperforming, the safety trade may have been a one day wonder; not likely.  As a point of reference, on March 9th not a single sector was positive from a TRADE or TREND perspective. Back then, we moved to our highest invested position in US Equities - looking at Keith's sheets this morning, now he's at close to his lowest. Apparently even a hockey player understands how to buy low and sell high.
 
The two sectors that led the way from the March 9th lows, Technology and Consumer Discretionary, have been lagging as of late, though they still finished slightly higher yesterday. Working against the potential move to 880, is the decline in the dollar, as the dollar index finished down just over 0.4% yesterday. 
 
While I'm in sync with my team's thesis that with the dollar down, everything else REFLATES, it is slightly disturbing to think that a real break down in the dollar from here suggests a whole new set of problems. Be careful staring into the rear view mirror this morning - as we look ahead, "reassuring" is going to be as convincing as Tim Geithner's larger macro stress test will get.
 
Function in disaster; finish in style.
 
Howard Penney
Managing Director  


 
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
 
EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/6. 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". 
 
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.


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