Thinking Time

"Tactics without strategy is the noise before defeat."
-Sun Tzu
 
Some people call me a strategist. Some people call me a "trader". Some people call me Mucker. Some people call me names. It is what it is, and I love every bit of it.
 
I love having people tell me what I can't do in this life. I love people who tell me "you can't make market calls." I love the friction in this game. I love the grind.
 
Our investment process is repeatable and applicable across durations. You tell me your game, and I'll be in my crouch at the face-off circle waiting to dance with you on the risks embedded in your strategy. This game is about being right, not being rigid.
 
Our daily note isn't about "trading" - it's an accountability mechanism. There is responsibility in recommendation. We don't want to hide. We want to test this industry's appetite for the ultimate transparency challenge. Who can get their feet on the floor and make the call, every day?
 
For those of you who are new to reading our morning missive, every 3 months the Research Edge Macro team boils down our intermediate term TREND (3-months or more) fundamental views into 3 Investment Themes. We do a conference call, and Andrew Barber's slides are really pretty. The idea is to proactively prepare for big macro moves, rather than spending our time reacting to consensus.
 
For Q109, our Themes were:
 
1.       REFLATION
2.       MEGA Squeeze (in US Consumer Discretionary)
3.       Socialism vs. Capitalism (long China)
 
For Q209, our Themes were:
 
1.       Breaking The Buck
2.       Cost of Capital Rising
3.       Autocorrelation's Apathy
 
For Q309, as I think about our most relevant Investment Themes, I've decided to take advantage of the weak British Pound and fly to Scotland on Sunday night. I'll be spending the entire week away from my family, my screens, and my phone, thinking.
 
I left Wall Street at the end of October of 2007, spent 6 months in my boxers, reading and writing - then I started this firm. Since then, there have been some major macro "calls" that needed to be made, and by God's good graces we've done our part. Now that we have seen the crash and the squeeze, I think the big moves are behind us. For now, I think markets will settle in and trade in a predictable range (SP500 904 to 958). I think that now is the right time to take another step back before I attempt to look forward.
 
Some of you just read that and said, thank God - get this guy off his soapbox, and on a plane. I know my team is fired up to have me out of the office! Now they can take their shots. We'll have 5 of our finest write their own Early Looks next week, and I'm already smiling as I think about what they might inspire. Nothing in our every day communication with you will change - I am only as good as my teammates. They run this firm.
 
What you'll see is a lot of what you don't get to see in what makes this firm real. I have been blessed with the pleasure and privilege of teammates who wake up every morning with one unified goal - being right.
 
Somewhere along the lines of industries maturing and reaching their saturation point of size and scope, they begin to  creatively self-destruct. Amidst all of the TRENDs and TRADEs in this global marketplace, that's what you're really seeing now. You are seeing the US Financial Services industry's Berlin Walls come crashing down. You are seeing new ideas crawl out from underneath their dust. From Beijing to Boston, it's fascinating to watch. Out with the Allen Stanford's of this business, and in with The New Reality: Transparency. Accountability. Trust.
 
While politicians politic and economists parrot all that's in our rear-view, you can finally hear the voices. Those are the voices that have never left this great country. Those are the capitalists who are allowed to see and hear.
 
On behalf of the 32 employees at Research Edge who you, our subscribers, have empowered and employed, I'd like to thank you.
 
Thanking you for your time to let us all think,
KM
 

LONG ETFS  

EWZ - iShares Brazil-President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt -leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country's profile matches up well with our re-flation theme.
 

QQQQ - PowerShares NASDAQ 100 - We bought Qs on 6/10 to be long the US market. The index includes companies with better balance sheets that don't need as much financial leverage.
 

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 think Energy works higher if the Buck breaks down.  Bearish TRADE and bullish TREND.
 

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

XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.  TRADE and TREND lines are positive.
 

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.