"Tension is who you think you should be. Relaxation is who you are."
~Chinese Proverb
A considerable amount of predictable tension was revealed in yesterday's global market trading. With the US Dollar up +1.5% on the day, the interconnectedness of global asset flows was revealed. Dollar up = lots of stuff that's priced in Dollars down.
After one US market down day from the YTD high, should we all freak out and run for the exits? Some tried. But managing money hysterically on the first day of the week (after global markets hit fresh 2009 highs last week) isn't going to get you paid. Price action was obviously negative across global currency, commodity, and equity markets, but it came on extremely light volume and nothing other than the noises people make when they don't understand macro correlation.
Relaxation is what you can thank your Asset Allocation to cash for. Tension is what you get when you're choking on a "fully invested" mandate AT THE YTD high for the SP500. Did I have a down day in the Asset Allocation Model Portfolio yesterday? Sure. When the market's breadth is 16% advancers to 82% decliners and you don't have shorts, you're not going to have an up day! That's what Asset Allocation is - it's not a hedge fund.
Post registering those YTD highs, hedge funds have been snagging a lot of headlines as of late. People in this business love to talk about performance, especially when it's good - and they should. This is a game where we keep real-time score. But don't forget that in the last 18 months that many a hedge fund manager has proven to be nothing but a glorified levered long investor.
Inclusive of yesterday's "oh my God - the market is going to crash again" calls to arms by the manic media, for the quarter to-date (Q209') the Dow is +13.2%, SP500 +15.8%, Nasdaq +18.8%, and Russell 2000 is +21.1%. Even a clanging monkey like me can make money on the long side in this environment!
So if you're having a great quarter - congratulations. Riding the REFLATION trade has been nothing short of bliss. I get that, and I fully support the message. What I don't get is the perpetual tension associated with anything that goes red. Just relax, and buy them when they are down. The next narrative of a "Great Depression" will be reserved for those who haven't come to grips with The New Reality: Buy red, sell green, and remember that calling for crashes AFTER they occur doesn't work.
Until the crescendo of consensus crushes it's R-Square, the most dominant global macro factor across asset classes will remain the US Dollar Index. Keep it dialed up on your screen - maybe play some classical music as it gyrates. It's one quote. It's easy to see. It's your massage table. Take deep breaths...
The US Dollar Index is trading down -0.79% this morning, and global equity, commodity, and currency markets are stabilizing again as a result. Asia's overnight equity market selloff came before we saw this morning's US Dollar weakness. Europeans woke up to the predictable, which was Russian rhetoric going back to beating the drums with their "colleagues" (the Chinese) and comrades about a new world currency reserve.
Putin Power broker, Dmitry Medvedev, took the conch to kick off the BRIC (Brazil, China, Russia, India) Summit in Russia this morning. What his finance minister (Kudrin) rattled people's cages with yesterday was a one-day, immediate term, TRADE. The Research Edge, intermediate term, TREND is the one that matters. The US Dollar remains broken across durations and it will remain the target of what we have been calling Replacement Rhetoric, for months and quarters to come.
The US Dollar's Credibility Crisis is what we get for paying off American Bankers, Politicians, and Debtors via the REFLATION trade. The world gets it, and with every tick on your screens on Dollar up days, most of the "I don't do macro" guys get it too. Don't stress about it. Just deal with it. "Tension", when it comes to "who you think you should be" isn't productive. Until the US Federal Reserve and Treasury systems lose their political polarization, the US Financial System will be as credible as the bed that said leaders of this system have made it to be.
My immediate term downside support for the SP500 is now 917. If that line were to break alongside a US Dollar Index breaking out to the upside above $81.89, I'll start making some sales. Otherwise, I'm going to stick with what's been working for the last 6 months, and get "longer of" REFLATION on market weakness as the US Dollar rallies to lower-highs.
Best of luck out there today,
KM
LONG ETFS
SPY - SPDR S&P 500 - The S&P500 corrected on 6/15 from the YTD high on low volume. The S&P 500 is positive from both a TREND and TRADE duration. This is a market that has a very predictable range, one we'll trade with a bullish bias.
QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 as a better way to be long the US market than the SP500. The index includes companies with better balance sheets that don't need as much financial leverage.
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 TREND duration and moved to negative territory for a TRADE. 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 resourcerich 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
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 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.
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.