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"I hope it was floor guys who smelled a rat in the financials and not some guy trading on inside info."
-Andrew Barber, Research Edge Macro Senior Desk Analyst
 
Do you smell a rat?
 
For me, it's always allergy season in Washington, so today we'll spare the politically compromised the inhale and put the closest thing you'll get to a You Tube of Wall Street rats in motion right in front of their eyes - an intraday price chart of Bank of America (BAC) yesterday with a volume overlay into the close.
 
While President Obama was prancing around the Whitehouse lawn with Pelosi yesterday afternoon proclaiming that "the sun is out" and that things are headed "in the right direction"... you can bet your Madoff that in the dark alleys of moral compasses lost, that the unregulated rats were setting up to trade the close on some Investment Banking Inc. inside information.
 
With her currency for sale again for the better part of the trading day, America's stocks were REFLATING higher. Then, just after 3PM EST, stocks started to drift in the face of an ole school smack down of BAC. Pictures don't lie folks; people do. Look at the accelerating volume into that BAC closing price, then follow the bouncing ball to an overnight issuance of 1.25 Billion (yes, that's beelion) shares of BAC stock! Trading into the close on non-public information anyone?
 
As we've learned over the course of the last 18 months, Wall Street leverage bankers and compromised government officials were paid handsomely to be willfully blind. Not being able to see risk because you are paid NOT to is one thing, but willfully deciding NOT to smell just makes this whole soap opera of US political rhetoric as sad as sad gets.
 
Now that every aspiring politician of corporate America can no longer use the Washington/Wall Street crutch of "oh, dear underlings, we have to fire you due to the most dangerous of circumstances since the Great Depression", what are the said leaders in this country to do? No seeing or smelling allowed!
 
Never mind seeing or smelling...  
 
Dear almighty President Obama,
 
Do you hear me now?
 
The New Reality remains. The world's markets are as real-time and interconnected as they have ever been. Technology and the speed of information transfer has never made playing this game so transparent. This morning, I can literally see inside information creep into Russian markets (trading up another +3%) from a wireless connection on a lake head in Canada, real time. It's called an Iranian missile being fired within range of Israel = oil prices up.
 
I like to tell my research team that using real-time prices and volumes as an anchor to their investment process provides them the opportunity to view inside information transfer, real time. If you don't think that's a critical part of understanding how this game works, open your eyes.
 
Whether its whomever they don't go after in trading ahead of BAC non-public information yesterday or the two SEC lawyers currently under investigation for insider trading here in the USA, it all comes out in the wash as the same thing - a global vote to sell the US Dollar. There is zero credibility in this behavior.
 
In a perverse way, this "Down, Buck, Down" move that wrote about in yesterday's missive remains positive for the US stock market in the immediate term. Let me repeat, this immediate term DOWN Dollar trade is what that duration is, REFLATIONARY today, tomorrow, and until the long term impact of Americans compromising the credibility of her currency runs its course.
 
In the long run, provided that our said leaders remain willfully blind and unable to smell, the US Dollar as we have all known it since Nixon abandoned the Gold Standard in 1971, will be dead.
 
If the US Dollar Index breaks down through my long term TREND line of $81.39, I think a currency crisis moves from being a tail risk to a probable one. Yes, that's a very bold statement. It's also one that Obama's big ears better have an ability to hear. God knows Geithner and the gang won't be passing their political gas his way for him to smell anytime soon. Rats don't fart in front of their boss.
 
My immediate term upside target for the SP500 is now a lower high at 931. I have an immediate term downside support level at a higher low of 878. Trade the market that's in front of you.
 
Best of luck out there today,
KM
 
 

LONG ETFS 

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.

XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

XLY - SPDR Consumer Discretionary-The TREND and TRADE are bullish for XLY.  The US economy is showing faint signs the steep plunge in economic activity that began last fall is starting to level off and things are better that toxic.  We've been saying since early January that housing will bottom in 2Q09 and that "free money" for the financial system will marginally improve the US economy in 2H09, allowing early cycle stocks to outperform.  The XLY is a great way to play the early cycle thesis.

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. 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 heat up.

XLK - SPDR Technology - Technology looks positive on a TREND and TREND basis. Fundamentally, the sector has shown signs of stabilization over the last eight weeks.   As the world demand environment becomes more predictable, M&A should pick up given cash rich balance sheets in this sector (and the game changing ORCL-JAVA deal). The other big potential catalyst is that Technology benefits from various stimulus packages throughout the globe - from China to USA. Technology will benefit from direct and indirect investments.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade. 
 
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
 
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. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.3642. The USD is down versus the Yen at 95.9000 and down versus the Pound at $1.5507 as of 6am today.
 
EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  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.
 
IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. Despite recent election results likely proving to be a positive catalyst, long-term 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.