"Fail to prepare. Prepare to fail."
-Roy Keane
I was on a plane from Philadelphia to Pittsburgh for the last hour of yesterday's US trading session. I missed the opportunity to buy and cover positions on the close but, patiently, I had been adding to our invested position in the Asset Allocation model throughout the last few days. We're now up to a 39% invested position in US Equities (as a percentage of our max allocation to an asset class) and down to a 44% in Cash.
With the exception of having to endure CNBC in my hotel room (they don't have Bloomberg TV), this morning's global macro factors look great. Across global equity, currency, and commodity markets, today looks as opportunistic as setups come. Opportunistic? Yes. We are moving into a proactively predictable trading range. In our Q3 Macro Investment Theme call yesterday, I called it "Range Rover" (if you'd like a replay of that call, please email ). Buy low, sell high.
Trading (or managing risk) around a range that we have prepared for is what we do. While we continue to have a hard time understanding what it is that some other people do, all we can focus on is what we do. That's it. That's our process.
As plenty of reactive investment managers sell low for the same reasons (the SP500 broke the 200-day moving average (884) yesterday), this is when you get in the game and take advantage of their groupthink. You don't have to go to college to wake-up to a market quote and say "hey, we broke the 200-day, that's bearish." In fact, it's rather sad that the sophistication of some perceived US fiduciaries only runs that deep.
We use the 200-day as an observation deck, of sorts. It's kind of like being at the zoo actually. Bring out the bananas in and around the timing of that 200-day line, and the behavior of the monkeys is quite predictable. For those of you who are ready to throw the keyboard at me for printing that - I'll get you a banana too. Evolve.
In the US stock market, here are the intermediate term TREND lines of quantitative support (3-months or more), that currently matter to my macro model:
1. SP500 = 871
2. Nasdaq = 1694
3. Russell 2000 = 477
I left out the Dow Jones, primarily because that's an index that is much narrower in reach (30 inputs) and more compromised in scope (companies that need financial leverage to earn a return), than the other three. We have only been on the short side of the Dow in 2009 as a result. On my and the monkey's scorecards, the Dow Jones Industrial Index remains broken.
Being long financial leverage (Dow, FTSE, Swiss SMI, etc...) is not where you want to be right now. From a risk management perspective, we refer to this as a "factor." No, it has nothing to do with your latest and favorite corporate access "One-on-One." It has nothing to do with anything you'll "fundamentally" analyze in a sell-side research report. It has everything to do with the embedded macro risks that you are holding in your portfolio.
We want to be "long of" the economic leverage associated with Chinese demand. We want to be "long of" liquidity. We do not want to be long financially geared returns.
Sorry Mr. Levered Long Private Equity man who bought something at the top in 2007. That's you. As we roll into the 4th quarter of 2009, the US Federal Reserve will be forced to follow the long end of the US Treasury curve. As a result, interest rates will move higher as we push into 2010 as access to capital starts to tighten again. This will create the mother load of all private equity sponsored bankruptcy cycles. Alongside John Merriwether blowing up another hedge fund this morning, that's what you hear in this low volume US stock market folks, the changing of the billionaire hedge fund/private equity guru guard.
How do we invest in such an environment? Timing is critical, as is price. Don't be a US equity centric "buy-and-hold" investor. Invest tactically, across asset classes around the world, at the right price.
Here are some important intermediate term global macro TREND lines of support to consider:
1. China (Shanghai Exchange) = 2597
2. Hong Kong (Hang Seng) = 16,185
3. Australia (AORD) = 3752
4. Germany (DAX) = 4658
5. Russia (RTSI) = 892
6. Canada (TSE) = 9656
7. Brazil (Bovespa) = 47,859
8. WTIC Oil = $58.92
9. Copper = $2.08
This is our investment process. These are the macro TREND lines that matter. Today is a great opportunity to get invested.
From the 3 US indices to the 9 aforementioned global macro lines, if we I see them break sustainably, I will be prepared to move. As one of the budding young stars on the Research Edge analyst team, Rory Green, reminded me the other day (from one of his homeland idols, Irish soccer legend Roy Keane): "Fail to prepare. Prepare to fail."
Best of luck out there today,
KM
LONG ETFS
USO - Oil Fund-We bought USO on 7/6 on a pullback in oil over the last week. With the USD breaking down, oil should get a bid.
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 and added to the position on 7/7 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. XLE is working against us as one of the worst sectors in the market right now. TRADE and TREND are negative.
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 6/29. Our healthcare sector head, Tom Tobin, wants to fade the public plan, and he's been right on this one all year.
GLD - SPDR Gold - Buying back the GLD that we sold higher earlier in June on 6/30. In an equity market that is losing its bullish momentum, we expect the masses to rotate back to Gold. We also think the glittery metal will benefit in the intermediate term as inflation concerns accelerate into Q4.
SHORT ETFS
XLP - SPDR Consumer Staples - We shorted XLP on the bounce on 6/17. Added to the position on 7/1, as our stance on the consumer is no longer bullish like it was in Q2, when gas prices and mortgage rates were dramatically lower.
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.
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