"Fear keeps you from making as much money as you ought to."
-Jesse Livermore, Reminiscence of a Stock Operator
At 3:25PM yesterday, I sent the following note to our Macro subscribers: "A close above 944 in the SP500 looks imminent and higher-highs are bullish. Away from being long REFLATION, being long short interest may be your next best bet. Squeezy is hungry."
"Squeezy" is the name of one of the Research Edge mascots - he's a shark, and he bites holes in the behinds of bears when they aren't expecting it. I have been bearish, and I have been bullish, but the Golden Rule that I discussed yesterday implies that I should never be wed to being either. I get paid to be right, not rigid.
This morning's #1 Headline on the Bloomberg box (in terms of how many people have already clicked on it) is "Stocks, U.S. Futures, Commodities Gain; Dollar, Treasuries Fall"... and that is what it is folks - it's called the #1 factor that has affected the macro side of your portfolios in the last 3.5 months - the REFLATION trade.
The US Government either A) doesn't particularly care about this US Dollar crisis or B) doesn't understand it. Having done a call with the CBO's (Congressional Budget Office) representative on US Dollar forecasting last week, we'll take B).
Obama may very well trust that the CBO's Director, Peter Orszag, does math, but someone needs to rattle his cage and wake this office up to the basic principle that forecasting the US Dollar requires a global macro investment process. If you think I am being political about this, think again. Call the office for yourself and it will take you about 3 minutes to get my point.
From the authors of Breaking The Buck, we now have the sequel - Burning It! In the short run, this is going to stoke REFLATION's fire. In the long run, the US Dollar's status as the world's reserve currency will be dead.
No, I don't mean dead as in its going away. I mean dead in terms of how the world considers the US Dollar's credibility. Three weeks ago, when I first started annoying you with this point, all I had was the world's new economic juggernaut, China, supporting my view. Today, alongside China, Russia, Germany, and even Australia, I also have the President of the World Bank, Robert Zoellick, talking about China diversifying and Lipsky at the IMF stating plainly that a "new reserve currency is possible"!
We're not being alarmist - this is a live and ticking situation that America has never had to deal with before. In decades past, we'd have a independent Federal Reserve stand up for itself (Volcker), and support America's currency with objective monetary policy (raising rates). Today, we have as highly a politicized process of monetary and fiscal policy as this country has ever seen.
So away from the "emergency" level free money policy that we have (which was prefaced by a conflicted narrative fallacy - The Great Depression, remember!), we now have a credibility crisis of generational proportions that is Burning The Buck.
If you're long commodities (or anything priced in Dollars), this is great! Again, that's in the short term. Yesterday, on the heels of Timmy Geithner being YouTubed again (bailing out his boys in De Banking Club), the Buck started to burn again intraday. As it burned lower, commodities melted higher. The CRB Commodities Index was up a sharp +2.7% on the day, and despite our British Philosopher friend's attempt to be "short of" crude oil on Monday's higher-low, the West Texas kind (priced in Dollars) has spiked another +6% in less than 48 hours.
Crude and Copper continue to make higher-highs, alongside Chinese demand. Last night, the Chinese reported a very impressive industrial production growth rate of +8.9%, rising sequentially from +7.3% last month, and putting the Panda bears to bed with a Squeezy session of their own. The Shanghai Stock Exchange was up another +1% overnight, making a higher-year-to-date-high at +54.7%. Stocks in Hong Kong closed up a full +4% on the day, taking their YTD gains to +30.6% on the Hang Sang Index. Great Depression "emergency" level of ZERO percent interest rates what??
All the while, REFLATION markets from Russia to the United Arab Emirates continue to power forward this morning, trading up another +2% and +3%, respectively. As the balance of economic power in the world shifts, make no mistake - in the end, REFLATING the almighty Petro-Dollar will have unintended consequences. Putin's Russia announced they are selling US Treasuries this morning - geopolitical risk is going to be back, in a big way.
Burning The Buck pays the Bankers, the Politicians, and the Debtors. Burning The Buck pays Putin, Ahmadinejad, and Chavez. We get it - that's why we re-invested 16% of the Assets in our Asset Allocation Model in the last few days. That's why I am back up to 22 long positions in our Virtual Portfolio. Do the said leaders of America's Financials system get it? You tell me...
My immediate term upside target for the SP500 is now 960. If you want to trade the last part of the REFLATION move (like I do), do so surgically, all the while respecting that "Fear keeps you from making as much money as you ought to."
Congratulations to our Pittsburgh subscribers and Sydney Crosby's Penguins on last night's win,
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.
SHY - iShares 1-3 Year Treasury Bonds - If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.
UUP - U.S. Dollar Index - We believe that the US Dollar is the leading indicator for the US stock market. In the imm.ediate 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.