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“You’ll miss 100% of the shots you don’t take.”
-Wayne Gretzky
 
We took the macro shot. Yesterday’s Game Time is now behind us. That’s it. Onto the next.
 
Predictably, Ben Bernanke pandered to the political pressures associated with getting a core constituency paid: Bankers, Debtors, and Politicians. He is hostage to his own personal history (studying depressions) and those savvy politicians who understand how to use that personal history as a backboard for their compromised agenda.
 
While, in the long run, this doesn’t end well for those paying the bills (US consumers via inflation and the Chinese holders of US Dollars), in the immediate term all you can do is focus on how you can get paid. Don’t get political or religious about this - just understand the dynamics of US Dollar Devaluation, and capitalize on it.
 
The Buck continues to Burn this morning, trading down another -0.35% to $78.51, taking its cumulative crash since March to -12%. In the face of the US Dollar’s rear-view mirror locking in yet another lower-high, the guys who shorted the double-butter-fly-wing-nut-top-formation in  whatever technical study Fast Money’s contra indicator (Guy Adami) was using Tuesday night are staring at the SP500 futures indicated up another 9 handles.
 
In all of my games of trading markets, I have never seen this level of groupthink. I’m not sure if it’s that a lot of people still don’t do macro, or if we are all just monkeys making stuff up – but the volume at this gong show continues to heighten.
 
Every time I make a “market call”, my inbox is rightly infused with opinions. We have been blessed with thousands of readers of this Early Look note every morning, and for that we are very thankful. One of the greatest advantages to my not running a hedge fund P&L anymore is that I get to sit at the heart of this exclusive network of information. The feedback mechanism is invaluable.
 
Most times, I know when I am making a call on the side of what we call the “pain trade.” That’s simply the trade that the hyper-side of the hedge fund community just cannot afford for me to get right. I can quantify this now, daily, by adding up the “McCullough you are going to get crushed” emails from people who don’t pay us. All of these emails have an agenda. The agenda, ostensibly, is to shake me like certain funds are always shaking the sell side banks. I don’t do banking. I don’t shake.
 
This all gets down to having a repeatable investment process that is your own. If you haven’t been able to evolve your investment process in the last 18 months, you’re probably not reading this email – and we’re all cool with that. This is the ultimate in Darwinian washouts. Those of us who are putting up positive absolute performance years here in the 2008-2009 seasons are going to live to play in this league another day.
 
Today is just that - another day. We can lose all of yesterday’s Game Time performance by getting too piggy. We can also miss out on the alpha associated with staying with what’s working. We are all hostage to our own emotions. The hardest thing for me to do every day is not book a gain too early.
 
So, let’s strap on those chin straps, and look at this morning’s US macro setup:
 
1.      US Dollar down

2.      US Equity Market futures up

3.      Immediate term TRADE upside in the SP500 to 1,015

4.      Immediate term TRADE downside in the SP500 at 1,001

5.      Top to bottom ranges in all markets continuing to narrow

6.      Volume studies continue to flash bullish (accelerating volume on up days; decelerating on down ones)

7.      Volatility (VIX) remains broken across durations (TRADE, TREND, and TAIL)

8.      SP Sector studies flashing bullish TRADE and TREND across all 9 sectors for the 19th consecutive day

9.      US Tech (XLK) led yesterday’s rally, and low beta Consumer Staples (XLP) lagged = bullish divergence

 
Extending our risk management view to where the puck is going as opposed to where it’s been, here’s the global view of the ice:
 
1.      China closed up for the 2nd day of in the last 3, taking the YTD gain in the Shanghai Composite to +72.5%

2.      Australian equities hit another fresh YTD high overnight (+21.2% YTD), proving the metal of the world’s best central banker

3.      Hong Kong +2.1%; India +3%; Thailand +1.6%; Indonesia +2.1%; Singapore +1.8%; the bull market in Asia continues…

4.      Western Europe trading up across the board after Germany and France showed sequentially improving GDP stats for Q2

5.      Germany trading +1.4% takes her YTD gains above those of the Dow and the SP500; one more country that doesn’t support the Bernanke view

6.      Turkey, a beacon for emerging market growth, trades up another +2.8%; the global free money rally continues to broaden

7.      Dr Copper busts as move to another new YTD high, trading up to $2.89/lb = +106% YTD, and telling Bernanke shame on you

8.      Oil prices are testing new YTD highs up at $71.30/barrel – yes, oil is priced in bucks, and Bernanke’s Bucks are burning

9.      2-year US Treasuries down at 1.15%; while the long end of the yield curve (10yr) is +257bps higher = politicized/socialized setup that’s great for banks

 
That last point out of the aforementioned 18 bullish points is the one that had the CNBC crew all in a heat last night. Charlie Gasparino couldn’t jump onto the Fast Money wire fast enough last night, literally panting into the phone that he saw John Paulson’s filing positions in Bank of America (BAC). McFly, that’s a June position. The date of today’s game is August 13, 2009.
 
Today is not a day to chase the manic media monkeys. Nor is it a day to chase other people’s “best ideas.” Today is one more opportunity to sit back, do your own work, and wait patiently for your opportunity to take the next big shot.
 
Best of luck out there today,
KM


LONG ETFS

XLK – SPDR Technology Tech and Healthcare remain the two sectors most primed for accelerating M&A activity in Q4. Both look great from an intermediate term TREND perspective, but at a price.

EWC – iShares Canada We bought Canada on 8/11 ahead of Bernanke’s pandering. Canada has what THE client (China) needs, namely commodities, which we believe will reflate as the buck burns.   

USO – Oil FundWe bought USO on 8/10. With Bernanke as the catalyst for the USD breaking down we want to be long oil.

QQQQ – PowerShares NASDAQ 100 We bought Qs on 8/10 to be long the US market. The index includes companies with better balance sheets that don’t need as much financial leverage.

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, which posted a positive Q2 GDP number.

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. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient 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
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.

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.