"To be trusted is a greater compliment than being loved."
-George MacDonald
This week's collapse in the credibility of the US Dollar puts what used to be the unthinkable in play - the potential for an American currency crisis. We may very well look back on yesterday as being the inflection point in the American Financial system for many months to come. Breaking The Buck is one thing; crashing it is entirely another.
Does President Obama get this? Only time will tell...
Can the man deliver on the promise of his rhetoric? Can he hear the voices of objectivity in America's financial ranks? Can he implement an inclusive financial risk management dialogue that isn't Goldman/Geithner centric? The answers to these questions will be paramount in the coming days, weeks, and months.
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Dear President Obama,
Whether you hear me now or not, this Buck stops with you.
From the market's opening bell yesterday until 11AM, I was selling as aggressively as I have in all of 2009. I wasn't doing this to amuse myself. When the risk management siren starts ringing, just like my Dad and the boys at the fire-hall, my only task is to get moving.
With the Dollar weak, stocks were strong. This has been the dominating macro factor in the US market since December, so I was getting great prices. That however is far from the point. The point, Mr President, is that after being bullish for the better part of the last 3 months, your economic team has lost whatever trust I had left in their leadership. Without trust, the only thing a stock market operator can do is keep moving.
I know you probably watched it, and whether you liked the outcome of American Idol's choice last night or not, America has voted. Similarly, whether you think Geithner's made-up rules to a made-up test for his made-up Wall Street/Washington friends have this country "moving in the right direction again", the Global Economy has voted. This is life - there is always a winner and loser.
The loser born out of the Geithner's bankers winning is America's currency. She is now as conflicted as the country's financial system that houses her.
To be clear Mr. President, I am a capitalist. I am also not as stupid as your US Secretary of the Treasury appears to consider his fellow Americans to be. The bottom line is that rather than protecting America's currency, Geithner has predictably chosen to protect his ole boy banking club. The Chinese get it; I get it; and if the US Dollar continues to break down, we're all going to get it. This Buck stops with you.
This week I have cut my exposure to US Equities in our Asset Allocation model in half. In our stock/ETF picking portfolio I have take the number of long positions down from the mid 30's to 21. Most of those 21 positions are winners with large % gains that I have owned for the last 2-3 months. I also remain long Gold (GLD) and Treasury Inflation Protection (TIP).
This is the invisible hand of economics that guides me, Mr. President, not my politics. Markets are built on confidence, not conflicts and compromises. After making 14 consecutive sales in the Research Edge virtual portfolio, I don't think I can ask you to hear me in a more explicit way. Watch what people do with their money, not what they say.
Real stress-testing is a proactive exercise that the brave men and women of risk management express with capital decisions in markets every day. "Tail risk" is what we are always on the lookout for. As those risks move closer to the heart of the bell curve of higher probabilities, we hedge.
I don't give lip service to the word crisis. Plenty a braver political soul didn't listen to me when I went to 96% cash in September of 2008. My risk management process called for a probable stock market crash. You can call me lucky, or call me right - that's not the point either.
The point, President Obama, is that if I am right this time - an American currency crisis will be your Buck to bear. I can now only hope that you get that message before it is too late.
My immediate term downside support level for the SP500 is now 880.
Respectfully,
Keith R. McCullough
New Haven, CT
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.
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.
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
EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
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 $1.3799. The USD is down versus the Yen at 94.6220 and down versus the Pound at $1.5658 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.