“Always bear in mind that your own resolution to succeed is more important than any one thing.”
-Abraham Lincoln
As Tiger Woods walked down the 18th fairway at the Bridgestone Invitational yesterday afternoon, Americans saw a man with undeniable leverage to his own resolution to succeed – that’s the kind of leverage you want to be long in this market.
In addressing his missing the cut at the British Open, he stated plainly: “I don't think as bad as everyone thought it would have been. You've just got to not have those bad stretches, just clean it up a little bit.”
Rather than take my financial advice, I suggest you start off this week and the end of the Q2 earnings season with Tiger’s. “Just clean it up a little bit” – take all of your portfolio mistakes and look at them for what they are. Housing has bottomed; unemployment has peaked; and no matter where you go this morning, there you are.
On July the 6th, when I posted our Macro Chart of The Week (posted every week to Research Edge Macro subscribers) and titled it, “Unemployment's Double Top”, I knew almost immediately how right I was going to be on calling a top in the unemployment picture. Why? That’s easy - no one, other than the math, agreed.
When no one agrees with you in this business, that usually implies some level of career risk. Luckily, I don’t work for anyone else anymore – and I can say what I think, whenever I want. This has proven to be a major competitive advantage in a Washington/Wall Street environment that is dominated by a generationally high level of groupthink.
Now that the market has absolutely smoked the Depressionistas last hope for immediate term raging double digit unemployment and savings rates. What are the top 3 groupthink “ideas” I see in the market this morning?
1. China is a bubble
2. Inflation isn’t going to be a problem
3. The market is going up on low volume
Our take?
1. China: We have been China bulls since December of 2008, and in our recently published “China Black Book” Andrew Barber outlined the probability of an initial -7% correction from the overbought highs. Last night, the Shanghai Composite closed down for the 4th consecutive day, taking the 4-day cumulative correction to -6.5%. We remain bullish on China, but at a price. This is not the time to call bubble, yet…
2. Inflation: In the immediate term, I agree. The USA will report another deflationary CPI # for July on Friday and will print another deflationary # for August (because, at +5.3%, the August of 2008 y/y compare was the highest report of the last cycle). In the intermediate term, America is going to see a major sequential ramp in reported inflation come Q4. Just in time for political football season as Bernanke plays defense for his year end job security.
3. Volume: While that may have been true 1 month ago, we have seen a major sequential ramp in both daily and weekly volume studies. In May-June, the market was going up on low volume; now the up days are on accelerating volume. Looking at this past Friday versus the Friday of 7/31/09, I had volume up +28%. Not a bad day for the bulls! The chase is on…
I’ll let the bubble watchers deal with their rear-view strategies of suggesting China could drop another -7% tomorrow. In the meantime, I think you buy China on down days and sell it on up ones from here. I’m going to start focusing my attention more acutely to groupthink item #2 – the forward looking call on Q4 inflation.
For our subscribers, our Macro team will be hosting our monthly strategy call this Wednesday. I’ll be giving an update on all three of our Q3 Macro Themes (Range Rover, Burning The Buck, and Reflation Rotation), and our Asia and Commodities strategists (Barber and Jones) will be diving into the drivers of the price of oil from here (if you’d like information on that call, please email . We remain bearish on the US Dollar; bullish on commodities; and bullish on Big Alberta’s (DJ’s nickname) oil.
When I was wrong on the high end of my Range Rover target, I changed my daily risk management strategy, immediately. With the exception of last week, where the US Dollar finally registered its first up week in the last five, the Buck has been Burning. Being wrong on the high side of my SP500 Q3 target was largely due to being right on the US government compromising the integrity of her currency at a more expeditious rate than even I thought possible.
From the MEGA Squeeze, to Housing’s Bottom, to Unemployment’s Double Top – those matches have been played. Next on this professional tour is Reflation’s Q4 Rotation. We’re looking forward to seeing competing opinions on the course. Bring your weather gear. When it’s raining out, we Macro guys believe you can get wet.
My immediate term TRADE target of resistance for the SP500 is 1,017, and I have downside support at 994. Buy low. Sell high.
Best of luck out there this week,
KM
LONG ETFS
COW – iPath Livestock — This ETN tracks an index comprised of two thirds Live Cattle futures, one third Lean Hogs futures. We initially began looking at these commodities because of recession inspired capacity reductions combined with seasonal inflections. A series of macro factors including the swine flu scare, a major dairy cattle cull in response to collapsing milk prices and the collapse of the Argentine agricultural complex due to misguided policy provided us with additional supporting fundamental data points for the quantitative set up in price action.
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.
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.
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.
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.
