Green Bananas

“Offer them what they secretly want and they of course immediately become panic-stricken.”
-Jack Kerouac
 
It’s no secret – monkeys want bananas. Get one of those qualitative “channel checking” Wall Street “consultants” to test that primitive theory. Green or yellow, when the monkeys are heated up in a panic, they’ll clamor for them.
 
Yesterday’s market meltup to new year-to-date highs (+11% SP500) was a real-time example of a Monday where humans were perfectly willing to inhale green bananas. With the advance/decline line as lopsided as 90%/10% at one point, there weren’t many green prices in that group-think cage that people weren’t willing to chase. The same 200-day Moving Monkeys who sold the red 879 close of July 10th (-14% lower!), couldn’t scarf down enough green. Hopefully you sold into them. I did.
 
While yesterday’s pre-open global macro setup looked great, this morning’s is a little less great. I know, that’s that hockey player turned zookeeper talking about changes on the margin again, but what happens on the margin matters most in markets. Everything has a time and price.
 
What’s changed in the last 24 hours? That’s easy - prices. If one of those super duper channel checker mall people were to start hiking prices while you were shopping, would you pant and pray for more of their wares? Of course not – only an ape would. So let’s all calm down and bring some semblance of sophistication to this profession.
 
The biggest global macro news in Asia overnight was that the Reserve Bank of Australia is done cutting interest rates. Aussi Central Bank Chief, Glenn Stevens, is in the midst of schooling Ben Bernanke on how the un-conflicted are allowed to think about monetary policy. Stevens marked a 55 year low in the RAB base rate at 3%, and his next move is going to be raising them.
 
Raising rates? Yes, you’re allowed to do that and pay your citizenry some level of return on their savings accounts. On this day in 1789, France abolished Feudalism. President Obama, your approval rating is hitting new lows as the markets hit new highs for a reason – the American people aren’t stupid. They get who is getting paid with a “Great Depression emergency” interest rate policy of zero - and it’s not them!
 
On the “news” that the Aussi’s are going to raise rates, what would Hank Paulson guess the stock market would do? Nope, sorry Mr. Squid Wrap, the market didn’t collapse into a calamity – it went straight up. In fact, Australia was one of the best performing stock markets in Asia overnight, closing up over +1%. Inclusive of that move, the Australian stock market up +18% for the YTD. Yes, this proves that you can have an interest rate that’s higher than zero and not be depressed.
 
At 3,471 on the Shanghai Stock Exchange Index, Chinese stocks hit another new YTD high as well. While everyone and their American monkey yelps about Chinese “loan growth” bubbles, those who are long China are now up +90.7% in 2009. Even a monkey like me can make money long China. Throw me a yellow one, eh!
 
Never mind China, I said this last week and I will say it again – on days that the US Dollar is down, simian primates can make money being “long of” pretty much anything priced in those once almighty US Dollars. At $77.57, the US Dollar Index hit another YTD low yesterday.
 
With the Buck Burning, the CRB Commodities Index (19 commodities) had a bright green day, closing +3.5%.  For any asset class, that’s a massive one-day move. In the US Equity market, the best performing SP500 sub sector was Basic Materials (XLB). Ironically enough, it’s green day also equated to +3.5%.
 
So as I was contemplating sending Mr. Commodity Bull Roubini a Tarzan loin cloth, what did I do yesterday? For those of you who get my real-time virtual portfolio moves at www.researchedgellc.com  you already know the answers to that, but here were the most important macro moves:
 
1.      Covered my short position in the US Dollar (UUP)

2.      Sold short the Dow (DIA)

3.      Sold short US Consumer Discretionary (XLY)

4.      Sold out of my long position in Germany (EWG)

5.      Shorted Italy (EWI)

6.      Shorted Apple (AAPL)

 
Yeah, I invited the Yale guys with the white coats over for lunch and we fired up our quant machines in a search of replicating the shorting of green bananas (these guys love concocting financial products). The best idea we came up with was shorting one of our favorite companies bearing the name of another fruit. If that AAPL is red today, I’ll probably cover it and book the gain. Never fall in love with a stock, her market, or a short position.
 
The risk in today’s market outruns the reward. I have immediate term resistance for the SP500 at 1,004 and downside support at 980. The US stock market’s overall setup remains bullish, but at a price. Don’t be panic-stricken. Don’t be a monkey.
 
Best of luck out there today,
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.

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
 
XLI – SPDR Industrials
We don’t want to be long financial leverage, which is baked into Industrials.

EWI – iShares ItalyItalian 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 and 8/3, which is finally overbought.

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 DiscretionaryAs Reflation morphs into inflation, the US Consumer Discretionary rally will run out of its short squeeze steam. We shorted XLY on 7/9, 7/22, and 8/3.

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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