"Faced with what is right, to leave it undone shows a lack of courage."
-Confucius
Los Angeles Dodgers skipper, Joe Torre, said he was "saddened and disappointed" with Manny Ramirez being revealed as one more of Major League Baseball's superstars who needed to cheat in order to succeed.
Whether its cheating or changing the rules as you go, do the leaders of the US Financial System strike you as anyone who has any shame at this point? Is there any irony, shame, or accountability in how close these Stress Test numbers ended up being versus the inside information leaks that the market was getting for the 3-days prior to the results? Is Timmy Geithner kidding me saying that this has been a process that the public can finally "trust"?
This entire political exercise has rendered itself plain sad. There is no other word for it. The world's You Tubes are on - the leadership from the US Treasury to American Investment Banking Inc. has once again been revealed. There is nothing right about any of this. Anyone who is allowed to take one deep breath and a step back, can look at this for what it is - nothing but a lack of courage.
Amidst all of the manic media's hyperactivity as to where the futures and Banker of America's stock is trading pre-open this morning, don't miss that ex-Goldman Chairman (actually, he still has Goldman stock and is a Director for De Club), Stephen Friedman, resigned last night from his post as Chairman of the New York Fed. This was Geithner's old seat, but it was no less a compromised and conflicted one then as it is now. Being in De Wall Street Club has always been what it is, and everyone knows it.
I'll be on Fox later on this morning, and I am certain that the first question will be 'what do you think about the Stress Tests'? My answer, on a lot of levels has been answered in prior missives but, again, I think Joe Torre's last night is a metaphor for America broadly - "The worst thing I think a person can be is a disappointment to somebody else"...
I am saddened and disappointed that my son Jack may have to live in a country where principles have been short sold in the immediate term for the sake of the compensation structures and political careers of compromised individuals. Shakespeare said that the "expectations are the root of all heartache", and I guess I expected more of President Obama, given what he has given lip service to.
Upward and onward we go then right? Ah, don't we all feel fantastic about the US Futures being indicated up one percent for the sake of this sad rhetoric...
The New Reality remains. The world isn't as stupid as our said leaders are. As the Wizard of American Oz's Financial System is revealed, everyone who has US Dollars is less interested in owning more of them. A country's currency is her credibility, and there is very little of that left.
In a perverse way, the US Dollar being down is bullish for a continued REFLATION trade in the intermediate term. This is why I have been bullish, on balance, on commodities, stocks, etc... for the better part of the last few months. In the long run however (which you hear the levered long community talking about again now that stocks aren't down), the US Financial system's integrity will be dead.
With the SP500 failing right at my line of resistance yesterday, you saw the SAFETY Trade that Howard Penney wrote about play out in textbook fashion. In the face of the US market flashing a massive outside reversal (attempting to breakout above the prior closing high, but reversing only to close at a lower level), we saw a stampede of volume come to life on the offer. NYSE volume was +57% on a day over day basis! No, this isn't what a bull wanted to see...
In the face of Geithner and Friedman maneuvering behind the scenes of the magical Land of Oz, the saddened market operators of the US stock market sold into the lemmings who legitimately believe that the Stress Test results provided a fundamental solution to all American trust betrayed.
Healthcare and Utility stocks charged higher as what we have been calling the "Three Horseman" (Tech, Consumer Discretionary, and Basic Materials stocks) of riding a generational short squeeze got creamed.
Do I think that this market will continue to make higher lows on selloffs? Sure, for now... I have SP500 support at 886.
All the while, as we make our clients money navigating this circus, am I going to ignore The New Reality? C'mon. Let's keep it real here folks. When it comes to genuinely addressing all that is wrong about the US Financial System, when "faced with what is right"... we have, sadly, left this one undone.
Have a great Mother's Day Weekend with your loved ones,
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
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.
