Bernanke's Bananas

"There is nothing more deceptive than an obvious fact."
-Sherlock Holmes
 
The global macro fact of the matter remains - when the US Dollar goes up, everything priced in those dollars goes down. That's what happened yesterday. Let's eliminate that from our minds and focus on today.
 
Today, the US Dollar is trading down again. And guess what? Oh yes dear leading indicator investors, those US Futures like that don't they! The fact of the matter remains - when the US Dollar goes down, everything priced in those dollars goes up.
 
At one point yesterday, the inverse correlation was a perfect 1:1. The US Dollar Index was up +1% and the SP500 was down -1%. Perfect is as perfect does, so in Forrest Gump fashion I simply re-shorted the US Dollar (UUP) and started getting "long of" things that would augur well to a reversal in that one-day move (US Technology ETF and the Australian Equity ETF). While one day performance always matters, it does not a TREND make.
 
Never mind intermediate term TREND, across all durations in my macro model, the Buck is Broken. We have 3 Macro Themes that we issue at the beginning of every quarter here at Research Edge, and one of them has been "Burning The Buck". Cramer, please stay in your cage. This banana is mine.
 
I have beaten this theme to a dead pulp in 2009, and I will continue to until the facts change. The fact of the matter remains - we are witnessing the most politicized directive that US monetary policy has ever seen. Don't fight it folks. Capitalize on it. There are no incremental buyers of significance for the American compromise anymore. The US Dollar will not find a sustainable bid until Ben Bernanke raises rates.
 
Since the professor of Great Depression storytelling outlined his economic outlook at his Humphrey Hawkins testimony last week, the short end of the US Treasury yield curve has gone straight up. Straight up? Yes, straight up into the right hand corner of the chart - get one of the 50-day Moving Monkeys to give you their read on it. Throw them a banana and they'll say "bullish." Since July 22, the yield on 2-year treasuries have gone from 0.93% to 1.18%. By my math, that's a +27% move in just over a week.
 
The Economist had a great one-liner in their Future of Economic Theory feature a few weeks back: "real scientists don't leaf through Newton's Principia Mathematica to solve problems!" Mr. Bernanke's rear-view considerations of what he learned in the library stacks about 1929 aren't going to help you risk manage your finances either. Let's seriously get with the program here Mr. Chairman. Mr. Market is embarrassing you.
 
Real-time markets are leading indicators. GDP, unemployment, and the history of Goldman blowing up levered long Investment Trusts in 1930 are lagging ones. For those who continue to manage other people's moneys using Bernanke's economic outlook as their leading indicator, all I can say is Godspeed.
 
Back to that Buck that Bernanke is Burning... here are the price levels and durations I am considering when I say that its broken:
 
1.      TRADE (3 weeks or less) resistance = $79.74

2.      TREND (3 months or more) resistance = $81.68

3.      TAIL (3 years or less) resistance = $82.77

 
I get to my numbers using these little mathematical monsters we fact oriented sleuths in math call fractals. I know, I know - these aren't the kinds of things like a 200-day moving average that my 2-year old can plug into Yahoo Finance and belt over the box at Merrill. My levels are born out of a global macro multi-factor investment process. A mathematician would call it complexity or chaos theory.
 
I know, I know - that sounds like being a quant. So what? It's better than sounding like a monkey. But if you throw my quant boys a banana over here, they'll eat them too ... and then they'll smile, reminding you that complexity theory may be the most relevant scientific discovery since relativity. It matters.
 
The global market place is an interconnected and complex system with dynamically changing inputs/outputs. When "smart" people told me that spending so much time on macro was "style drift" 3 years ago, I actually had to grind my teeth and listen. Today, some of those people have closed their almighty funds.
 
Today is one more day where we have an opportunity to recognize that we have a wonderful opportunity in modern day finance. We have the opportunity to evolve.
 
We have an opportunity to quantify our decision making processes rather than qualify them. After all, this is a tidy way of auditing all of Washington and Wall Street's storytelling. While fiction is entertaining, don't forget that the stories theoretically make sense because they are made up.
 
Today is the first day this week where the immediate term reward in the SP500 outruns the risk. I have immediate term resistance/support at 995 and 965, respectively. If Bernanke's free money bananas are on the table again today, eat'em.
 
Best of luck out there today,
KM


LONG ETFS

EWA - iShares Australia
-EWA has a nice dividend yieldof 7.54% on the trailing 12-months.  With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's reacceleration, there are a lot of ways to win being long Australia.

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.


SHORT ETFS

UUP - U.S. Dollar Index - With a +1% move in the USD on 7/29 we shorted the greenback. This is how you earn a return on the socialization of the US Financial system's risk. We believe that the US Dollar is a 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 US dollar.

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.