"The pressure not to lose has been replaced by the pressure not to miss out."
-Seth Klarman (Founder of Baupost)
I love airplanes. Other than in the shower and in movie theatres, it's one of the few places that no one can email or call me. It's a great place to think. As I was grinding through my pile of reading on a flight to Chicago last night, I came across that simple, but very timely, quote by one of Boston's investment managers, Seth Klarman.
There are many players in this game who operate with a one factor investment model - price momentum. They chase it down. They chase it up. That's not new - what is new is that we have a generationally high level of players in the game doing it. They all have tremendous pressure not to lose. Daily, weekly, monthly returns - this is the pressure cooker.
The pressure not to miss out is one of supply. As a result, we have created an institutional investment business in the USA that is setup for cyclical mean reversion. One of the very best mean reversion investors of this generation is another Boston based lad by the name of Jeremy Grantham.
In Grantham's recent July letter he called the current market levels a "Boring Fair Price." And this morning, with the SP500 at 979, I have to agree with that conclusion. While all of the 200-day and 50-day Moving Monkeys are pressured to chase one another around the group-think keepers cages, we continue to settle into a low volatility range bound tape. If you missed calling the crash or the squeeze, too bad. Get over it.
I know - now I have complimented 2 people in the same note and offended my beautiful wife for insinuating that I don't love her every cell phone call (I do Laura!). There must have been something in those world class Chicago ribs I had last night. There is also something about this pressure cooker that makes me a little itchy.
Itchy? Yeah, you know - scratching. How will it all end? We all know that it won't end well. This could be the toothpick industry and my conclusion would be the same. Like in any oversupplied industry, we need to reduce capacity. Since we've decided to socialize this game, the natural progression of supply coming down just happens at a slower pace. It's kind of like injecting a game of Monopoly with moneys from the heavens on the hour, every hour - keeping the levered alive.
So what's my call on the US market this morning? That's easy, Range Rover. Here are my immediate term TRADE levels of support/resistance:
1. SP500 962-994
2. Nasdaq 1
3. Dow 8
Unlike the "level 3" super "side pocket" gurus of everything Wall Street securitization, we manage risk on a marked-to-market basis. Every 90 minutes of trading our global macro models refresh risk management levels. As a result, when price/volume/volatility changes, we change our view.
On the US Equity side, I don't disagree with Grantham's take - he said he wants to "buy quality and short junk." I have expressed this view somewhat differently, but it gets me to the same place. I want to be long liquidity and short financial leverage. From a macro perspective, this is why I remain long the Nasdaq (QQQQ) and short the Dow (DIA). From a bottom's up stock picking perspective, this is why I remain long a 4 letter name in the Nasdaq with a great balance sheet like Yahoo (YHOO), and short the ole school house of leverage games past, General Electric (GE).
If you're on the other side of Grantham and I, congratulations. As the US Government has opted to Burn The Buck, all Debtors and owners of junk got paid. "Got" would be the most important word in that sentence. Be certain of this, if/when the US Dollar rallies, a lot of the debtor obligations that are denominated in US Dollars will start to underperform. Yes, the price of junk can be the recipient of a socialized process of REFLATION but, in the end, it's still junk.
The Lords of The Tops (Mega Private Equity Funds), will have plenty of junk to re-issue to Wall Street. This morning you are seeing KKR in the news again, floating the idea of bringing one of their pigs with lipstick back to the public market. Never mind those Chinese IPO's folks, we gotta get ourselves some of that overstored US Retail capacity ala Dollar General!
I am sure that Goldman will be leading the no growth "dollar store" stagflation deal, and my sincerest of congratulations to those bankers for gaming this system for what it is - a pressure cooker. People need to do what they need to do to get paid. We get it.
Whether it's the current US Private Equity overhang of $400 billion USD, the Chinese stock market having its biggest down day (-5%) in the last 8 months overnight due to a massive IPO overhang, or yesterday's 2-year auction for US Treasuries showing the demand of a dribbling catheter... it's all one and the same. We have a supply problem that's structurally here to stay - and as prices rise, we have the hyperbole of an increasinginstitutional "pressure not to miss out."
Best of luck out there today,
EWG - iShares Germany - We bought Germany on 7/28 on a pullback in the etf. Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and budget balance to timely incentives such as the auto rebate program. We believe that Germany's powerful manufacturing capacity remains a primary structural advantage; factory orders and production as well as business and consumer confidence have seen a steady rise over the last three months, while internal demand appears to be improving with the low CPI/interest rate environment bolstering consumer spending. We expect slow but steady economic improvement for Europe's largest economy.
XLK - SPDR Technology - Tech got smushed for the 2nd day in a row on 7/27. Buying red.
QQQQ - PowerShares NASDAQ 100 -With a pullback in the best looking US stock market index (Nasdaq) on 7/24, we bought Qs. The index includes companies with better balance sheets that don't need as much financial leverage.
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.
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.
XLF - SPDR Financials - Shorted Financials on a bounce on 7/27 with the yield curve as good as it gets.
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 - As Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9 and again on 7/22.
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.
"The pressure not to lose has been replaced by the pressure not to miss out."