"Tactics without strategy is the noise before defeat."
-Sun Tzu
Managing risk around this proactively predictable trading range remains our objective here in Q3. All of the noise you hear about "200-day moving averages" to crashes and "Chinese bubbles" are just that - noise. Capitalize on it.
After getting hit on Monday, Asian equities have busted another move to the upside. With the exception of Japan which was flat overnight, most of the major Asian stock markets have tacked on an impressive 2-day rally.
Last night's moves in Asia included:
1. China closing up another +1.4%, making its 2-day move +3.5%, and establishing yet another new YTD high of +75.2%.
2. Hong Kong +2.1%, making its 2-day move +5.8%, and breaking out above my immediate term TRADE line.
3. Taiwan +1.5%, Korea +2.6%, Australia +1.5%, Thailand +2%, India +3%, and Singapore +3.4%.
The Chinese strategy continues to inspire leadership in the region. Their tactics have been surgical. Their execution, flawless.
China is the 21st century's growth engine. If you are American and don't like the sounds of that - too bad. Not unlike Americans versus the British at the outset of the 20th century, the Chinese couldn't care less.
Remember that China's stated foreign reserve policy is to maintain three objectives: 1. Liquidity, 2. Safety, and 3. Returns.
By the way, those are unlevered returns backed by organic growth. No, you haven't seen the Steve Schwarzman of China yet have you? That American private equity poster child would be the antithesis of the Chinese investment philosophy.
Say what you will about your levered long lovers here in America. The Chinese have liquidity. And lots of it. This morning China reported their money stats. Chinese foreign reserves shot up another $178B to $2.13T. That "T" is as in TRILLION. And that is, like the 2009 performance of the Shanghai Composite Exchange, a new high.
Within the Chinese money stats was this little critter that US politicians don't want to talk about called the money supply. M2 (a measure of the money supply) in China ramped up to +28.5% year-over-year growth in the month of June. That too, is a new high.
With the US government creating more money than God could right now, there is a lot of money floating around out there in this brave new interconnected global world. In the immediate term, it will continue to be reflationary. In the intermediate term, it will lead to one of our Q3 2009 Investment Themes - a Reflation Rotation. And in the long term, reflation will ultimately morph into inflation.
Before you get your shirt in a knot about inflation, take it off, relax, and get a tan or something. We won't see the political football of reported inflation accelerate in the USA until Q4. In between now and then, all you need to do is buy low, sell high, and trade the range.
Chinese growth accelerated sequentially in Q2 (versus Q1). That we know. What we don't know is where that growth will end up in Q3. What we know is that economic growth comparisons for Q3 are quite easy (earthquake of generational proportions last year, plus the country's lockdown for the Olympics). What we know is that stock markets are leading indicators, not lagging ones - and our real-time update on that for both China and Asia overall is on the tape.
Stay long what The Client (China) needs, not what America wants them to need. In the last few weeks, both copper and gold have held their long term TAIL lines of support (copper = $2.08/lb, gold $871/oz). Stay away from the US Dollar (we're short) and US Treasuries (10-year yields trading back up to 3.54% this morning are signaling that my long term view of reflation morphing into inflation is going to be right).
In the immediate term, China is now OB (over-bought). So please don't run out and buy it up here with the 200-day monkeys at +75% YTD. In the immediate term, the US Dollar Index will be oversold again at $79.58 and the SP500 will bump up against its immediate term TRADE resistance line of 913 in and around this morning's open.
In the intermediate term my Range Rover call remains (SP500 871-954). In the long term, as you listen to all of the noises of those who missed both the crash and the squeeze, remember that the "tactics without strategy is the noise before defeat." China gets this, and so should we.
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.