"In order to form an immaculate member of a flock of sheep one must, above all, be a sheep."
-Albert Einstein
With all of the early cycle economic recovery facts largely in the rear view, it's actually getting harder to NOT chase the flock these days. On Friday, I started selling at 2:21PM, but the reality is that I had been selling too early throughout the week, so what do I know anymore?
Other than not translating my risk management decision of selling longs into shorting everything that ticks, I guess the only good news associated with my not waiting to sell everything at the highs on Friday was that I proactively predicted my own behavior. After all, my Early Look from Tuesday May 5th was titled "Selling Early"!
After a great March/April run, I've been taking down exposure to long positions that have worked. That exposure move and the recommendation to downshift the beta in your portfolio (buy healthcare, gold, etc...), was not an explicit signal to start short selling everything you see that's up. With the US Dollar getting hammered like it is right now, being short anything in size that could be the recipient of a more amplified REFLATION trade is borderline reckless.
In our virtual stock picking portfolio (see www.researchedgellc.com) I have recently cut the number of long positions in the portfolio in half. At the beginning of May, I wrote about running with a 30-8 ratio of longs to shorts - now I'm at 17-9. Unless the SP500 breaks down and closes below the 894 line, I'll keep a long bias.
With the SP500 up 37.4% from the March 9th Depressionista freak-out low, am I interested in shorting stocks? Of course! I'm always interested. I love shorting stocks. I am as interested today as I have been every day in 2009 - but that doesn't mean I need to giveaway performance for the sake of feeling "smart" - smart is as smart does.
Having read more than a few of the "smart" money quarterly letters from Q1's end when the flock of sheep was telling you to lock hoofs with them and jump off the cliff, it will be fascinating to You Tube some of their mid-quarter updates. For Q2 to-date, the SP500 is up +16.5% to the strong side and the Russell 2000 is up a mind numbing +21.1%.
So, with the Stress and the Swine tests out of the way, what is a stock market operator to do this fine Monday morning? Now that earnings season has squeezed the brains out of the "oh, you just wait for earnings season" sheep, should we already be looking forward to next quarter? Should we stay long, or should we go short whatever and be wrong?
Being on the sidelines is a reasonably safe job, if you can get it. I don't especially enjoy riding the pine here as I watch other market participants collide head on, but I needed a break. With volatility (measured by the VIX) as oversold as the US Dollar is all of a sudden, I'm cool with watching, for now... the SP500 could easily drop 4% in a day, or over the course of 1-3 days for that matter, and I don't think a whole heck of a lot about this game will have changed. We'll keep making higher lows on selloffs.
For now, the most dominant macro factor playing out on the field of the US market remains Dollar DOWN and everything priced in Dollars UP. The US Dollar is broken across immediate and intermediate term durations. If the US Dollar Index breaks my long term duration line of 81.11, that's when I will stop talking about Breaking the Buck, and focus more explicitly on Breaking America's Back.
A country's currency is the confidence interval that the world has in her. Around the world, as either the commodity prices that they anchor on or The Client (China) they service goes, so do foreign currencies. Right now, as the US Dollar's Credibility Crisis moves into prime time, you're seeing breakouts in foreign currency markets from Brazil to Australia. These countries don't have the compromised and conflicted banking system that we have - or at least if they do, it isn't being You Tubed, daily....
As the world's sheep flock to perceived higher integrity pastures, what is a US stock market operator to do? Pray? Maybe - but what side of your book would you be issuing your most passionate cries for help - long or short? Are you an investor for the "long run" or a Depressionista who gets smoked in the short run?
I certainly don't purport to know the answer to any of these questions, but I do know that I won't be rubbing elbows with the likes of Bill Ackman as they find their way back onto CNBC to talk about being invested on a levered long basis. BEFORE the markets crashed to the downside, the sheep were blind. AFTER the markets had the most fantastic short squeeze in modern history, they remain, "above all, sheep."
Failing to close above the US market's January high of 934 will be bearish in the immediate term. Closing above it will be bullish. I have an immediate term upside target for the SP500 of 941, and a downside support level of 894.
Best of luck out there this week,
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.
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.
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.
