Eye on Fed Centricity...

Unfortunately, I have to reintroduce an investment Theme that I already used in Q4 of 2007 while writing my MCM Macro Blog - "Fed Centricity".

I say unfortunately, because after 8 months of being burned, Wall Street's perpetually bullish narrative followers refuse to read the facts. The end to this story is going to be a painful one for the US equity market to traverse.

From the mass media to the sell side, we have ourselves a mania in "Fed Watching" - I call it Fed Centricity . As a psychological factor, never in the history of any book I have read on markets has there been anything remotely as amplified as the US Fed Centric view that has emerged.

While sitting here on the research floor at Research Edge right now, I am watching Brazilian Central Bank head, Henrique Meirelles, give the Bloomberg TV reporter a tutorial on objective and proactive monetary policy. The reporter looks awkward. And After raising rates to over 12% in order to fight inflation, his stock market and currency is strong, and unlike US policy panderers, he looks right.

Former Chancellor of the Exchequer in the UK, Nigel Lawson, also sounded very sober and right this morning in pointing out that Ben Bernanke and Co. are going to "regret" not following their weathered European colleagues in fighting inflation.

Manias never end well. Bernanke's legacy won't, and neither will the performance of the US investor who is levered long to a US Fed Centric view.

Larry Kudlow's mass media program ends nearly every segment with the tag line that Free Market Capitalism Is the Best Path To Prosperity! ... but Kudlow wants the US Government to intervene at every turn?? That's not free market capitalism Larry - sorry ... you've been 'You Tubed'.

Fed Centricity is something to be weary of, and we have our Eyes on it.

Shorting Mexico...

Mexican stocks have been surprisingly resilient in the past few months. However, yesterday, with the market -1.4%, we saw a negative divergence in Mexican trading and alarms went off in my macro models. I like shorting things when they are up, so I am waiting for an up day now, but the EWW (Mexico iShares etf) will be shorted using a 59.44 stop loss limit on the high side.

While Mexican export exposure to the US economy has come down from its 2001 peak of almost 90%, anything over 80% remains a massively relevant risk exposure to a country's GDP.

As slows in Q3, Mexico will.


Eye on Putin Power...

As European Equity markets are down -1.5-2% across the board, limping into the close of their trading day, one country index remains unlike the others - Putin's Russian RTS Index, trading flattish.

Since I issued my "Sell" call on the US on May 16th, Russia has held up relatively well, outperforming US stocks by a considerable margin. If we go back to April 1st (see chart), we see "Putin's Power" quantified, with a stock market appreciation of +14%.

Yes, this has a lot to do with commodities, and from a stylistic factoring perspective Russian stocks look a lot like Canadian stocks do. Other than maybe the Canada/Russia gold medal hockey games, natural resource exposure to oil and natural gas is about the only 2 things these cultures have in common.

Do not underestimate the risks associated with Putin's Geopolitical Power amplifying.

(chart courtesy of

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Pakistan Pounded Overnight: Not Making the Cut

Pakistan was down another -1.9% last night, putting the Karachi 100 index down an Eye opening -22% since the global crisis in everything basic foods related began. Unlike Bernanke's Fed, these countries in Emerging Markets consider food CORE .

In Malaysia, stocks got clocked again, closing down another -1.2% as political unrest associated with inflation are bringing PM Badawi to his knees with an emerging "no confidence vote" in his government. Inflation has far reaching consequences relating back to our Theme of Eye on Social Unrest.

"Emerging" does not stand for buy everything "Emerging Markets". Right now it stands for "Emerging" economic crisis brewing in Asia that I call Stagflation.

It is "Global This Time", indeed.

China bounced overnight: Golf Clap...

Chinese stocks avoided their 11th consecutive day of losses overnight, closing +5.2% on the day.

Like a nice putt, we'll give this aberration in the data a golf clap. The "Trend" in the data is a crashing one. Inclusive of today's bounce, China is down -52% from the "its global this time" October 2007 highs.

My next support for the Shanghai Stock Exchange is 2696. Today the Index closed at 3085.


(chart courtesy of

Volatility: Beware...

The VIX is looking to breakout big time here. While it is +6% on the day, if it can close above my 22.23 line, i think this is going at least +45% higher over the course of the summer.

No charts. No other points to be made here.

It is time to manage risk, not take it.

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