Missing The Cut

"I just made mistakes... And obviously you can't make mistakes and expect to not only make the cut but also try and win a championship."
-Tiger Woods

After shooting a second 2nd 74 and Tiger missing the cut at this weekend's British Open, one of the more prescient thinkers in our subscriber base pointed out that quote to me. His point was that this is how the leaders of the US Financial system should behave. Holding themselves accountable. Looking in the mirror, calling it like it is.

Instead, what you're going to see this morning is more of the same. Woods will be back at the practice range, and Wall Street's finest group-thinkers will be out in full force talking about the economic "recovery" that they completely missed. Sadly, unlike Tiger - they'll behave as if they missed nothing at all.

Who missed this REFLATION trade? YouTube them and you tell me. Rewind the tape to 5 months ago and show me which one of these economic savants weren't scaring the hell out of the American public ranting about Great Depressions. AFTER seeing the SP500 rip higher for another +7% weekly move, are they bullish? You bet your Madoff they are - AFTER the fact. Washington and Wall Street job security depends on revisionist history.

Asia continues to teach America a lesson in high octane, unlevered, growth. Last night, Japan was closed but the rest of Asia roared higher for another big up day. The world's new economic leader, China, closed up yet another +2.4%, taking her 2009 score to +79.5% - that's another new YTD high. On the heels of Chinese strength, stocks on the Hang Seng tacked on another +3.7% move. Hong Kong equities are up +12.5% in the last 5 trading days and have now piled on a +35.6% YTD gain!

The New Reality remains: China's 21st century domestic consumption growth is reminiscent of that little train that could in the early part of the 20th century, the United States of America. China is now The Client. It's time for America's institutional investors to be "long of" what China needs versus what the US government wants them to need. Copper and oil prices were up +10% and 8%, respectively, last week - outperforming US Bonds, big time.

China doesn't need any more US Treasuries. Get your 200-day Moving Monkey to pull up a chart of the yield on 10-year US Treasury yields. Yes, at 3.7% this morning it is breaking out across all 3 of my durations (TAIL, TREND, and TRADE). Yes, Ben Bernanke is going to be chasing the long end of the marked-to-market curve. Yes, that change in US Federal Reserve policy rhetoric is as imminent as a monkey making money on the long side of the REFLATION trade right now.
Imminent returns? Oh yes, fellow commoners - if we Burn our Buck like this, everything priced in those bucks will continue to REFLATE. Never mind these silly details like Bankers, Debtors, and Politicians getting paid. You American commoners didn't make the Wall Street Club's cut! After missing the cut, the US government will be issuing you a zero rate of return on your savings account, and some Q4 inflation just in time for Christmas.

This morning the Buck is Burning, again, trading down another -0.56% at $78.87 on the US Dollar Index. After last week's -1.1% dollar decline, the negative price momentum associated with a completely politicized monetary policy in America continues. Going back to when Nixon abandoned the gold standard (1971), the US Dollar has only sustainably violated the $80 level twice. No, don't remind those Washington professors of economics when the last time was - that too, would be professionally embarrassing.

There is no embarrassment in admitting when you are wrong. Every mistake I make is up with a real-time quote on the Research Edge portal. Not learning from your mistakes is what is embarrassing - and unfortunately, Greenspan's ghost still remains in this country's leadership closet.

Tomorrow, Ben Bernanke will have one more opportunity to establish some credibility in America's currency. I am fairly certain however that his Humphrey Hawkins testimony will not be focused on how alarmist the US government's rhetoric had to be in order to get interest rates to an "emergency level" of ZERO.

The global macro market of countries, currencies, and commodities are currently betting that Bernanke maintains that the US outlook didn't miss the cut. Marked-to-market odds currently have the politicization of the short end of the US yield curve remaining intact. That's why the US yield curve is very close to being as steep as it has EVER been.

My intermediate term TREND support for the SP500 remains 871. My long term TAIL of resistance remains 954. The best thing I can tell you right here and now is stay with our proactive plan in managing risk around that range.

What you are hearing from Wall Street's consensus forecasters will continue to be completely backward looking. After a +40% move in the SP500, the House of almighty Goldman is raising their SP500 target this morning. Thanks for the Early Look guys - what would this country do without your stewardship.

Best of luck out there this week,
KM


LONG ETFS

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.

COW - iPath Livestock - This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.  

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


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