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"If you are out to describe the truth, leave elegance to the tailor"
-Albert Einstein
Earlier this week I titled an Early Look "The Truth", and I'd say that it inspired the highest level of thoughtful responses that I've had on a note in quite some time.
The feedback mechanism associated with our making a call on markets every morning is fantastic. While I was on the buy side no one with a real thesis would give me the kind of real-time information that I get now (they'd buy/sell their position, then tell me). Being at the hub of an exclusive network is tremendously additive to our fact finding mission. We want the truth, not a political confirmation bias.  
The takeaway from the latest feedback that I have been getting is quite simply that investors are very much politically and emotionally charged right now. Trust in the US Financial System is becoming a secular issue. Obama has big ears, so he better hear this - and "get it", because confidence is what economies and markets are built on, not rhetoric. China is up +70% and the US down -2% YTD, respectively, for many reasons - but the delta in confidence is a major one.
Consider the following two comments that are hitting the wires this morning:
1.      "History provides numerous examples of non-independent central banks being forced to finance large government budget deficits... further increase the burden of the national debt on current and future generations" -Don Kohn (US Federal Reserve President)

2.      "Despite whatever talk you might have heard, I don't see that there is movement away from the notion of the dollar being that currency" -Robert Gibbs (US Press Secretary)

Forrest Gump might read those two comments as:
1.      The Fed is politicized, not independent as it was intended to be - and there will be unintended consequences associated with that, in the end

2.      Hey, isn't that John Kerry's press secretary from 2004? When did he start doing macro?

Credibility in any financial system starts and ends with the truth. If you don't have credibility, you sponsor volatility. If you sponsor volatility, you are signing off on emotion. If you're making decisions emotionally, I call that a reactive risk management process.
What "you might have heard" is that the US Government is Burning The Buck. Because they didn't want to proactively address the truth of the global macro matter, now they are on the defensive. Obama's ratings are falling fast. Shaking hands with Gaddafi last night probably won't improve that over the weekend either.
Main Street America isn't as stupid as what you "might have heard" from Washington or Wall Street. Americans know where their bed is at night, and they know darn well where there money is in the morning. If you burn their currency, they don't have to hear it - they see it.
YouTube is a metaphor for the transcending trend of transparency. Obama crushed the Clintons with that, and now he and his economic team are hostage to it. It's a global macro factor that is as relevant as any right now. That's not a political statement. That's how The New Reality works.
When it comes to Burning The Buck, "you might have heard" that some people are getting paid. I call them the Three Little Pigs - it's a children's story, so it's very easy to understand:
1.      Politicize/Socialize your financial system and currency
2.      REFLATE things priced in Dollars by devaluing
3.      Bankers, Debtors, and Politicians get paid

Despite a non-qualified US economic official who has decided to give his opinion on this and suggest that "I don't see there is a movement away from the" US Dollar, doesn't mean that the rest of the world is paid to be as willfully blind.
As the Buck Burns, and everything priced in those dollars pays the conflicted aforementioned constituencies, who loses?
1.      China
2.      US Savers
3.      The Dollar

The feedback I get is that people do in fact see and hear. Amazingly, some people can do even both at the same time.
"You might have heard" this morning that China continues to walk away from this Crisis of Credibility and control their own destiny. This morning's economic data out of China shows another sequential (month over month) improvement in exports alongside the 4th straight monthly gain in Chinese home prices. While I am sure that Alan Abelson and the Barron's boys are teeing themselves up to have a "China Bubble" cover sometime soon, "you might have heard" that Barons and CNBC aren't the places that helped you avoid the US stock market crash of 2008 and the generational short squeeze of 2009.
My intermediate term TREND line of support for the SP500 remains 871, and my long term TAIL line of resistance remains 954. US Equities have moved to my lowest Asset Allocation across the options that I have globally. You might have heard that other people don't have to invest in things they don't trust either.
Enjoy the weekend with your respective families,


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.   

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.

EWJ - iShares Japan -We're short the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary - We shorted XLY on 7/9 on a rip as our team has turned negative on consumer.  

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.

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.