“Charlie and I believe that when you find information that contradicts your existing beliefs, you’ve got a special obligation to look at it – and quickly”
Other than consensus starting to finally become bullish enough, I really don’t see anything in global macro this morning that should stop the upward momentum of anything priced in US Dollars. We have new highs, a new month, and a New Reality.
After trading down for the 4th consecutive week, the US Dollar is down again this morning, hitting new YTD lows. As we roll out the backward-looking barrels of Alan Greenspan and Larry Summers economic forecasts, the manic media will finally come to realize that they perpetuated one of the most ridiculous narrative fallacies since “Chindia” – the Greatest Depression. The only depression I saw was that of Wall Streeters who missed one year’s bonus.
As Barclays and HSBC print big league profit growth results this morning, you can bet your Madoff that the bankers are going to get paid. The New Reality of Burning the Buck remains: as the US government devalues her credibility, her currency will continue to crater. As the Buck Burns, three core constituencies get paid: Debtors, Bankers, and Politicians. If you’re a Chinese holder of anything US Dollar denominated or an American commoner who saved, shame on you.
With the SP500 lassoing all short sellers of Camp Roubini/Rosenberg, we’re at least seeing one of these one-way economic prognosticators throw in his towel this morning. Nouriel Roubini is long term bullish on world travel. He loves helicopters and flying the friendly CNBC skies of fictional storytelling. Overnight he has made a mea culpa of sorts while speaking in Australia – he is now bullish of commodities!
AFTER the price of copper has moved to +92% higher for the year-to-date (trading at new YTD highs alongside the Chinese stock market this morning), and both oil and gold prices are busting another move to the upside, Doctor Doom is taking a ride on the bullish side! Stick to your new day job of selling market crash books my man – there is this thing called timing that we global market operators care about – professors shouldn’t manage the public’s daily marked-to-market risk.
As the US Dollar hits new YTD lows at $78.14 this morning, the US stock market futures are setting up to register another YTD high. This pre-open setup makes perfect sense to me. After seeing the SP500 close +7.4% for the month of July, Rosenberg bears are finding information on the Q2 earnings season that contradicts their existing beliefs.
Don’t underestimate how many people are out there who were not allowed to be bullish into these earnings numbers. Now that all of those short sellers have been put out to pasture, all they can do is whine about “valuation.” Being short “valuation” in a market that’s building price momentum alongside sequentially accelerating volume and expanding positive breadth, is something we can leave up to the brave. Yes, Mr. Abelson – that’s you again.
Abelson hasn’t mentioned his China bearish thesis in quite some time. However, this weekend he did highlight David Rosenberg’s thoughts on valuation mind you… and at the end of the day, without these guys ignoring their special obligation to look at the facts, this latest rally in everything priced in Dollars wouldn’t have this lasting kick.
Here are 3 global economic facts to add to your existing beliefs this morning:
1. China’s manufacturing report (PMI) made another new high for July at 53
2. German Retail Sales improved again in June to -1.6% versus -2.9% last month
3. UK manufacturing PMI (July) moved into the economic expansion zone with a reading of 51 versus 47 reported in June
I know, I know… some of these numbers incorporate that silly stuff we math guys call derivatives. When rates of change improve, we do recognize them for what it they are – positive relative to expectations. At the end of the day, this investment process is agnostic. If the facts, on the margin, change to the negative… we’ll “have a special obligation to look at it – and quickly.”
My immediate term TRADE upside target for the SP500 is 998 and I have downside support at 975.
Best of luck out there this week,
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.
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.
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.
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.