"What lies behind us, and what lies before us are small matters compared to what lies within us."
- Ralph Waldo Emerson
I was on a flight to Los Angeles last night and I could not stop thinking about the manic groupthink that has become the US stock market. Being on a Virgin America flight where I was hostage to getting the market's post close news from CNBC didn't help. I wonder if Larry Kudlow knows about You Tube's archiving process.
The morning after another squeeze, what lies behind us is another higher-low. What lies within us is a prejudice to follow the herd. What lies before us is a small matter of perceived institutional job security in managing risk based on what lies behind us.
AFTER we crashed, how is it that everyone is a professional prognosticator of crashes to come? At a price, are people allowed to be bullish? Or do we need Meredith Whitney to remind us that the sun rises in the East and Goldman is going to crush the quarter?
AFTER the US stock market locked in 4 consecutive down weeks, Dennis Gartman is the latest to come out calling for new market lows. Yesterday, Fast Money's czar of British hedging philosophy stated "we've no choice then to conclude that the recent bull run from the March lows was nothing more than a bear market correction, and that new lows lay yet ahead." No choice? I have no other than to call that out. Garty, the math implies you are looking for a -34% crash in the SP500 from here - just fyi.
AFTER the US stock market closed above its 200-day moving average (878), the one-factor model monkeys now have themselves quite a trapeze act to explain. Or do they? Who holds those who are flinging your moneys around like bananas accountable? When it comes to their investment process, what is it, exactly, that they are getting paid to do?
In the last few Early Looks I have been focused on China and Japan. China hit another new YTD high last night, closing up another +2.1% at +72.8% for 2009. Meanwhile the Japanese stock market finally had an up day after 7 consecutive down ones. This morning, let me shift gears back to the US and be crystal clear on my US stock market stance for Q3 of 2009. I think this market has a high probability of trading in a proactively predictable range - on our Q3 Macro Theme conference call we called this Range Rover.
My intermediate term TREND of downside support for the SP500 remains 871, and my long term TAIL or upside resistance remains 954. The Volatility Index (VIX) broke it's immediate term TRADE momentum line yesterday ($28.92) and remains broken across our three key durations (TRADE, TREND, and TAIL). Credit spreads are healthy, and the yield curve (247 basis points wide this morning) looks as good as any socialized banking curve you can find.
What lies before us this morning is another day of risk management. Having "no choice" is not what we do. If the SP500 breaks down and closes below the 871 line, I have a choice to call the next level of support whatever it is. I also had a choice to sleep in this morning, but I didn't. Not being able to "trade" or manage risk is a choice. So is selling low and buying high. I make a lot of mistakes, but I don't have to subscribe to the arbitrary Wall Street rules of technical "200-day" alchemy.
As the US government sponsors a Burning of The Buck, don't underestimate the power of the math. When the US Dollar goes down like it did yesterday, everything priced in dollars goes up. Another government stimulus plan will only erode America's balance sheet and her currency further. My new trading range for the US Dollar Index is $79.57-$82.46.
Today is the morning after. Manage risk around the game that's in front of you - what lies behind us is yesterday's news. Markets look forward.
Best of luck out there today,
KM
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.
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
XLI - SPDR Industrials - We don't want to be long financial leverage, which is baked into Industrials.
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.
DIA - Diamonds Trust- We shorted the financial geared Dow on 7/10, which is breaking down across durations. We are long the NASDAQ via Qs, which is long liquidity and economic leverage.
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.
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