• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

"You have to learn the rules of the game. And then you have to play better than anyone else."
-Albert Einstein
 
As I wake up today I'm seeing that most European and Asian markets are trading higher after being weaker for the past week. This is what markets that correct do. Yesterday's news from Alcoa may calm fears over the upcoming earnings season, yet with Alcoa losing less money than thought, does that really mean "less bad" is still "good"?   Maybe, but I don't get paid to believe it!
 
One of our Q3 MACRO themes is "Range Rover", a call that the S&P 500 will trade in a tight trading range of 9% in the intermediate term. We have branded this duration as  "TREND".  Despite the low volume and downward momentum in the market over the last two trading days, the S&P 500 has held our critical 871 support line.  We aren't fading right on the goal line - that's what people with no process do. We're sticking to our game plan.
 
This upcoming earnings season is going to be critical look into what we can expect for the second half of 2009.  Alcoa's loss of $454 million was better than consensus as the company was able to cut costs by putting people out of work.  Good for profitability, bad for the economy!  Looking at demand, the company intimated that some aluminum markets showed signs of improvement, but the fact is that worldwide aluminum consumption will decline by 7% in 2009.  This is a pattern we are seeing in every US sector:  demand remains soft and companies are cutting costs to improve profitability.  
 
We all know this is not a sustainable trend, but for now it does not seem to matter. What matters in our macro model happens on the margin. Six months ago, don't forget that every reactive CEO in America was firing people under the narrative fallacy of a Great Depression. While things are bad (in recessions that's generally the case), on the margin, they are better than those prior fear mongering expectations.
     
The reality is that the economy is bottoming, but it's not really getting much better.  Last night the Group of Eight leaders said the economic recovery was too fragile for them to consider reversing efforts to pump money into the economy.  Free money live on! This morning you are seeing 3-monht LIBOR trade down to new lows at 0.51%. By any historical measure, that means money is cheap.
 
This is also being confirmed by Oil trading above $61, after declining -17% over the past week.  The news flow suggests that a rise in U.S. gasoline inventories means demand remains weak.  Increased concerns are also being reflected in the VIX, which was up 1.5% yesterday and has been up for four straight days.  Lastly, the risk aversion trade is working with the Dollar index up 0.07% yesterday, now up for five straight days. Don't forget our Breaking/Burning The Buck call - Dollar up = everything down.
 
I could wait till 7am Eastern to see what the Bank of England announcement will be on their rate policy, but there is probably no hurry to remove its free money policy. This situation has been completely politicized, and that is what it is. While Ben Bernanke might be fighting for his job, rates are going to stay low everywhere until it's absolutely certain that economic recovery is self-perpetuation via REFLATION.
 
Right now the evidence from corporate America suggests that demand remains soft.  Cost cutting is a "one time event" and is not a long-term investable theme.  The earnings season is upon us - GAME ON!
 
Our intermediate term TREND line of support for the SP500 remains 871, and longer term TAIL resistance is 954. Trade the range.
 
Function in disaster, finish in style.
 
Howard Penney
Managing Director
 

LONG ETFS

USO - Oil Fund-We bought USO on 7/6 and 7/8 on a pullback in oil. 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.