“Everything comes to him who hustles while he waits.”
-Thomas Edison
While it makes perfect sense for market operators to take some time off in the summer, Mr. Macro Market waits for no one. Yesterday, I wrote that I was going to wait and watch for the US Dollar’s reaction to this US unemployment report – that doesn’t mean I stop hustling.
For me at least, this is not unlike preparing for a hockey game. The discipline and repeatability of my preparation process is critical. If I sleep in or let someone in my inbox distract me, I will undoubtedly miss something. You have to eliminate all the noise – stay focused.
What’s most interesting to me this morning is the Russian stock market getting hammered (down over -3%) after their central bank CUT interest rates. Not only is it interesting from a causal perspective, but it correlates with the reaction we saw in Indonesia on Wednesday (they cut rates to 6.25%, and stocks on the Jakarta Composite Index suffered a -1.8% down day). This is new.
What’s new? The marked-to-market reaction to central bankers pandering to the political pressures to cut interest rates is much different than what we saw 9 months ago. At that time, I called it “going Greenspan” – which simply meant that Asian and European central bankers simply followed the strategy that the US Financial System’s “maestro” taught them. Everyone cut rates.
Since then (in a testimony to Congress in October 2008), Greenspan himself has gone on the record saying that there “was a flaw in the model that I perceived as the critical functioning structure that defines how the world works.” Doh! Now what?
Now what we have are a lot of politically compromised (and very inexperienced) international equity market policy makers being directed by a failed strategy of perceived wisdom. That’s not good – and Mr. Macro Market is going to fix it.
As opposed to some of those Blackstone “marks” on their private equity book that Steve Schwarzman marked-to-model (UP!) in his Q2 earnings report, Mr. Macro Market operates on a real-time, marked-to-market, basis. No, this isn’t new. This has been happening for hundreds of years. The only thing that is new is that the American Financial system has allowed the “how much money do you make” mantra to eclipse the laws of bid-asked gravity.
Gravity is what you are seeing Mr. Macro Market show you in these countries that continue to cut interest rates ahead of a significant acceleration in reported inflation here in the USA in Q4. This is one of our three core investment Macro Themes for Q3 – we have labeled it “Reflation’s Rotation.”
Cramer is too busy getting bulled up on Citigroup to poach that one liner from me this morning, so let me explain what it means before his hounds make a US currency style debauchery out of it. Reflation Rotation means that instead of reflating prices (Q2-Q3 of 2009) from year-over-year DEFLATION price levels, REFLATION will morph into reported INFLATION in Q4. That’s it. It’s that simple.
Does Mr. Macro Market see this coming? You tell me – here are his marked-to-market signals this morning:
1. Chinese demand is running in the high single digits now year-over-year now to the point where their government admits the need to tighten “appropriately”
2. Inclusive of the corrections they’ve seen in the last 3-days, stocks on the Shanghai and Hang Seng are still up a by a moon-shot in 2009
3. The US Dollar continues to make a series of lower-highs and lower-lows (imports inflation to America by Q4)
4. The CRB Commodities Index continues to make a series of higher-lows and higher-highs (that’s why the American commoner is bitter)
5. Dr. Copper, one of inflation’s best prognosticators, is trading at $2.71/lb this morning – that’s will be +94% over Q4 of 2008 prices (no more deflation in Q4)
6. Oil prices continues to test YTD highs, and will be trading 2x where they were in Q4 of 2008 (no more deflation in Q4)
7. The US Treasury yield curve is trading within 15 basis points of its all-time steepest this morning at +255bps wide (10’s to 2’s)
8. 3-month LIBOR (as in the rate that $375 Trillion of the world’s debt is based off of) is hitting new YTD lows this morning at 0.46%
9. The US Financials sector ETF (XLF) is up over +125% since March 5th of this year (classic reflation rotating into inflation)
The Bank of England opted for the political compromise yesterday, keeping Quantitative Easing in place. The pound immediately got pounded on that news, and this morning you are seeing the FTSE in London trade down a full -1%. If there is one country that has been willing to sacrifice her currency’s credibility for political job security other than the USA, it’s the UK. The Dow and the FTSE are two of the worst performing markets in global equities YTD for good reason.
The New Reality is this: if you maintain an un-objective monetary policy into Q4, Mr. Macro Market is going to sniff you and your lack of domestic rates of return right out of your hole. As for the right here and now, well… I’ll deal with how the US unemployment report affects the US Dollar in 2 hours. In the meantime, I’ll hustle while I wait.
My immediate term upside TRADE target for the SP500 is now 1,012, and I have downside support at 991. A breakdown through 991 puts 969 in play.
Have a great weekend with your families,
KM
LONG ETFS
EWG – iShares Germany —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 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.
XLV– SPDR Healthcare — Healthcare has lagged the market as investors chase beta. With consumer confidence down and the reform dialogue turning negative we like the re-entry point here. Buying red.
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.
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.
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.
