"With enough courage, you can do without a reputation."
-Rhett Butler (Gone With The Wind)
On this day in 1936, Gone With The Wind was first published. If you know any Depressionista who has yet to see the movie, send me their email address - the title is a great metaphor for the consensus storytelling they plugged the manic media with only 3 months ago. Maybe I'll send them a copy. Then they'll see what a real Depression looks like.
Three months is a long time - if you're short the best quarterly move in the US stock market since 1998 that is! I often smile when I hear of Wall Street's "long term" investors - some of them can't seem to muster bucking up for stocks when they should actually buy them for the long run. Then they complain that people that do are "just traders." Leave your scorecards with the clubhouse guys, and don't forget to sign them - this game is now being YouTubed.
While the June we put up was below average at best, April and May were two of the biggest months of our careers. Looking back, I will not mistake our Q2 for anything other than what it was - not being on the wrong side of a massive market move.
As of last night's close, the SP500 and Nasdaq were up +16.2% and +20.6% for Q2, respectively. If you're not into making proactive "market calls", you can look at those returns and say goodbye. Who needs those kinds of numbers for the long run, right? Don't worry, you're definitely not going to see them again in Q3. Now they're "gone with the wind."
Tomorrow will be a new day, month, and quarter. The people of Iraq will be "free", sort of... and the price of geopolitical risk will continue to rip higher at gas pumps worldwide. If the price of gas isn't high enough by year end, the Russians announced this morning that they'll be raising it by another +10% in 2010 anyway. Ah the unintended consequences of Burning that Buck. Putin, Ahmadinejad, and Chavez, have at it.
After seeing the REFLATION trade associated with Burning The Buck morph into consensus in mid-June, we have ourselves quite an interesting setup developing in global equities. Should I stay or should I go? Will the US Dollar find a bid in July like it did in January? Or will its credibility continue to be gone with the wind? Predictably, after seeing equity deals quintuple in Q2 (vs. last quarter) to $26B, the bankers are back, and Jaime Dimon is already talking about raising them banker base salaries! Great Depression?
If you want to see who the real "short-term" investors in this country are, look no further than Washington and Wall Street - dollar down gets the bankers, politicians, and US debtors paid. Trading down at $79.64 this morning, the US Dollar Index is stoking the fires of inflation. Inflation? As Scarlett O'Hara replied, "I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow."
My Macro team's call is that REFLATION will morph into INFLATION by Q4. I know, I know... that's not what Bernanke is forecasting, but that's the point. Run an accountability check on the poor man's inflation forecasts for the last 3 years!
No one in the politicized Federal Reserve system is allowed to make this call, yet...
They will have to once reported inflation (CPI and PPI) accelerates on a year over year basis in Q4. The Q4 2008 comparisons for basically anything with a marked-to-market price are incredibly low. Do the math; it won't take your investment team very long to get answers we have.
For all of my "invest for the long run" fans out there, in terms of levels, here are 3 lines in my 27 line model that matter right now:
1. US Dollar Index $82.18
2. Oil $68.67/barrel
3. Copper $2.19/lb
If these price levels hold (i.e. the USD doesn't breakout above that line and oil/copper don't break down below those lines), we will begin to see REFLATION morph into INFLATION in Q4. If these and the other 24 prices in my model change, I will. That's it. That's my call.
So what to do with this call? Well, I'm kind of a day-to-day risk manager type of a guy. So I'll when I wake-up to new prices tomorrow, I'll let you know. While the "long term" folks seemingly don't worry so much about getting wet while walking outside on days that it's raining, I'll be sure to have some umbrellas on hand. My Scottish golf caddy, Fraser, gave me a great big one.
That great big quarter we just printed is gone with the wind. Congratulations to some of our clients who we know had monster quarters - upward and onward we go.
I have immediate term upside resistance for the SP500 at 935, and I'll start making some sales there. We crossed a critical breakout line of immediate term TRADE support at 920 yesterday. Use that tiger line as the one that needs to hold, or we'll be out of bounds again on the bullish momentum side of this market.
Best of luck out there today,
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 resource rich 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.
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.
XLV- SPDR Healthcare - We re-initiated our long position in healthcare on 6/30. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.
SHORT ETFS
EWI - iShares Italy - Italian Prime Minister Silvio Berlusconi has made headlines for his private escapades, and not for his leadership in turning around the struggling economy. Like its European peers, Italian unemployment is on the rise and despite improved confidence indices, industrial production is depressed and there are faint signs at best that the consumer is spending. From a quantitative set-up, the Italian ETF holds a substantial amount of Financials (43.10%), leverage we don't want to be long of.
XLY - SPDR Consumer Discretionary - We shorted XLY on 6/19 as our team has turned negative on consumer in the last week.
XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17.
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.
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