200-Moving Monkeys

"Monkeys are superior to men in this: when a monkey looks into a mirror, he sees a monkey."
-Malcolm de Chazal
 
Irrespective of the 200-day Moving Monkeys clanging for cover, you may have noticed that some actors in this circus continue to take themselves very seriously. And maybe they should. This is a serious game of storytelling. Particularly for those without a mirror.
 
I might write a children's story about them. Maybe a Curious George tale. Or better yet, how about a "best of" You Tube video? Are all Moving Monkeys the same? Or do they rotate cages on those 6 panel CNBC shouting matches when shown the green banana of an up market day? Who eats green bananas anyway?
 
At yesterday's bright green 940 close, the SP500 is 0.6% off her YTD high. No, these returns are not Chinese (+75.2% YTD). No, these are not the returns of a Great Depression either. These super special 2009 YTD returns for the SP500 (+4.1%) are especially for the monkeys.
 
They are for Merideth Whitney, who launched her firm as bearish as you could be before the most expedited short squeeze in modern history. They are for Nouriel and Garty. Never mind if one was hyper bearish at the March lows and the other last week - who cares about some silly accountability metric like a +39% rally from March 9th or a +7% one from July 9th? This is the CNBC zoo where professional monkeys rarely have to be called out on the instant replay.
 
Our Q3 Investment Theme call of Range Rover remains. Buy the SP500 at 871. Sell at 954. As the monkeys clang for crashes and bubbles just sit back, take your time, and manage risk around their noise.
 
Research Edge is an accountability mechanism. Every position, its timing and price - it all has a time stamp. Have I been early shorting things this week? Sure, but I was also early buying things too. On July 9th, with the SP500 closing at 982, I had my highest invested position of 2009. That's not me trying to get a helicopter ride to my next media event - that's just shot that I decided to take.
 
On May 27th, 2009 I agitated the consensus bears when I wrote an Early Look titled "Roubini The Revisionist" - suggesting that the former professor turned manic media rockstar was going to fly his helicopter of pessimism into a wall. This morning, his revisionist tales are next to impossible to comprehend. Are you bullish? Are you bearish? If the recession ends in 5 months, do you stay short that lagging economic indicator until that day? Martini or caviar?
 
The New Reality remains: as everyone is trying to call for crashes and bubbles AFTER they occurred, we're just going to trade in a proactively predictable range.
 
As we squeeze the temples of consensus to the high end of my range, I will be selling. When and if we revisit the low end of my range I will be buying. Monkey hockey player, yes I am. Monkey say as monkey do.
 
The Volatility Index is broken across all 3 of my durations (TAIL, TREND, TRADE), the yield curve (10 year US Treasury yields minus 2's) is 260 basis points steep, and the TED Spread (my best measure of counterparty risk) is as narrow as it gets - only 34 basis points wide.
 
These cross asset class risk management facts were not a whole heck of a lot different on July 9th. The only thing that's changed is Wall Street's narrative. We are seeing an unprecedented level of groupthink impact what used to be the world's finest financial system. While not as concerning as piling leverage on top of leverage, it's getting close. Larry Kudlow is not a fiscal fiduciary. He is a partisan perma bull with a TV contract.
 
The only way out of this is to take away the bananas and put the monkeys on mute. That will be most effectively achieved by raising the Fed funds rate. Don't forget that the steepest the US Treasury yield curve has EVER been is 270 basis points wide. All that means is that the short end of the curve is politically compromised and conflicted. When that happens, three constituencies get paid: Debtors, Bankers, and Politicians.
 
Every payout to Washington/Wall Street has a payer. As the Buck Burns, so do our Creditor's anxieties. Them Men and Women with the Yellow Hats be Chinese and American. If you want to earn a rate of return for being fiscally responsible (saving), this Fast Money trade aint for you.
 
Whether its weak demand for Chinese government bond sales last night or the government of Hungary issuing 5-year debt this morning at 6.8%, the long term cost of capital in this world is going higher, not lower. Capital in an interconnected global financial system has no religion. It's not political. Over time, savers seek rates of return on their moneys. Japan and the USA don't get that yet. Over time, I hope they do...
 
Hope, of course, is not an investment process. As cost of capital heightens... and the access to it tightens... the 200-Moving Monkeys at GE's financial entertainment division will go away. That's when I'll call this a bull market. For now, this is just a circus of clanging monkeys, and I am happy to trade the range of their predictable behavior.
 
Have a great weekend,
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.

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.

CYB - WisdomTree Dreyfus Chinese Yuan - The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

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.

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.  

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