"I followed a golden rule, namely, that whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make memorandum of it without fail."
-Charles Darwin
Darwin's Golden Rule is one that needs to be rigorously applied to The New Reality of global finance. Global markets, across countries and asset classes, are as interconnected as they have ever been. Those who get this will triumph as the horse and buggy whip investment structures of levered long cycles past continue to collapse.
I have learned many a lesson in a compressed period of time in this business by simply using live ammo. I learn by making mistakes. I then force myself to un-learn, and re-learn. That's it - that's what I do.
What it is that other people do, isn't entirely clear. In many cases investment mandates aren't real-time and objective - but we must thank God for the blessings associated with mental inflexibility. Without that, market's would actually have a chance at being efficient across all durations, and there wouldn't be any market "calls" left to make!
Last week, I wrote an Early Look titled "ZERO" - as in I took my position in US Equities to zero. On balance, that position didn't hurt me - but it really didn't help me either. The YTD high for the SP500 came at the close of trading on June 2nd, so I wasn't there holding the bag of levered long exposure after a +40% trough-to-peak short squeeze of generational proportions... but I don't think I made anyone any money last week either. I don't aspire to be average - and that's all my "ZERO" call was.
Yesterday, the market touched my immediate term support level of 927, so I started covering and buying. Having any position in this increasingly correlated market place of global macro factors should never be perpetual. My "ZERO" position turned out to last all of a week.
The Golden Rule, in simpleton hockey speak, boils down to a very basic premise. One of my mentors in life, Coach Tim Taylor, called this "moving your feet." As the factors around you are changing, you have to be changing with them. If you stop moving your feet (and you have the puck), prepare those risk management models - because there is a heightening probability of your getting run over.
We'll see how Sidney Crosby's feet are moving tonight in Game 6 of the Stanley Cup Finals - my proactive prediction is that they'll being moving real fast. But what about the group-thinkers of Wall Street's braintrust? In the last 3 days of US fixed income trading, plenty of cost of capital assumptions have changed... and no one seems to want to do anything but limit their career risk in addressing them.
What does that mean? Oh, that's the little thing called nodding that some people in our business do in meetings when their bosses have a stagnant investment point of view. Trust me, I got fired for being too bearish in Q3 of 2007 - I don't do nodding.
This morning's groupthink is glaring. If I have seen one article quoting someone with a title in this business about Bernanke not raising interest rates, I have seen 100 - and that's probably only because I only have one set of eyes. Fifteen out of the 16 "primary dealers" of the US Federal Reserve don't think the Fed hikes rates in 2009. That's about the same number of soothsayers in De Geithner Club who didn't see a stock market crash coming in 2007. Can they afford to think he might hike?
What are some of the critical facts that have me getting invested in REFLATION again, at a price?
1. Chinese stocks on the Shanghai Stock Exchange powered forward again last night, closing at fresh YTD highs of +53.1%
2. Dr. Copper, who has an 88% correlation to China's stock market in 2009 , is hitting higher-highs this morning at $2.31/lb (that's +64% YTD)
3. The US Dollar faded like a sell side strategist trying to call the SPYs right at long term TAIL resistance of $81.72 yesterday, re-igniting REFLATION
4. Oil prices have shot up over +2% in the last 24hrs (Gartman shorted oil yesterday on the pullback, sorry man)
5. Russian equities (which anchor on Chinese demand and Oil prices) are trading up almost 1% again this morning, taking them to +75.3% YTD
6. 3-month LIBOR, which has gone down, literally weekly for months, bumped up this morning for the 1st time - on the margin this matters
I have 27 factors that change dynamically in my macro model, so I could go on and on... but the bottom line is that I make moves in terms of both Asset Allocation and virtual long/short positions as the facts change. Sometimes these facts and correlated factors change quickly, sometimes they don't. But the Golden Rule remains - "whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make memorandum of it without fail."
With a highly incentivized (and politicized) US Financials system geared towards letting Piggy Bankers get paid via a US Dollar collapse (nice to see Timmy is back in the USA and JP Morgan's stock riding higher into yesterday's close in the advent of a morning headline "10 Banks Allowed To Payback TARP"!), I get where I need to move next - being longer of things that can REFLATE. All the while I can maintain a "ZERO" level of trust in the said leaders running this US stock market joint.
My immediate term upside target for the SP500 is now a higher-high at 963. I'm bumping up immediate term support to 928. Trade the range.
Best of luck out there today,
KM
LONG ETFS
EWA - iShares Australia- EWA has a nice dividend yield of about 5% on the trailing 12-months. With RBA rate cuts showing signs of working and a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.
FXA -CurrencyShares Australian Dollar Trust-Thanks to recovering Chinese demand for commodities, the sure handed management of RBA Governor Glenn Stevens and comparatively modest consumer debt levels -Australia's GDP continued to expand in Q1 while other industrialized economies saw double digit declines. As with Canada, we like the Australian economy as an offset to the toxic US balance sheet.
XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We bought XLV on 6/08 to get long the safety trade.
EWC - iShares Canada- We want to own what THE client (China) needs, namely commodities, as China builds out its infrastructure. Canada will benefit from commodity reflation, especially as the USD breaks down. We're net positive Harper's leadership, which diverges from Canada's large government recent history, and believe next year's Olympics in resource rich British Columbia should provide a positive catalyst for investors to get long the country.
XLE - SPDR Energy- We bought Energy on 6/05. We think it works higher if the Buck breaks down. Bullish TRADE and TREND remain.
CAF - Morgan Stanley China Fund- A closed-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.
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.
XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser.
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.