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“Sharp downward movements do that… they focus the mind, like a good hanging used to do in the Old West.”
-Judge Roy Bean
Despite Friday’s US equity market selloff coming on one of the lower volume days of the month, this morning’s follow through selling in Asia and Europe has us focusing the mind…
Last week’s catalyst of Bernanke pandering is now in the rear-view. Today’s risk management task is to look forward. Now you are seeing a US Dollar strengthen in international currency trading. Almost every time that happens, you’ll see weakness in everything priced in dollars. Commodities are trading lower right now, as are US stock market futures. This shouldn’t be a surprise.
The manic media will be looking to build a narrative around the weakness in the US futures. I’ve already heard “Japanese GDP being lower than expected” at least half a dozen times since I woke up. For one, I am short Japan (via the EWJ etf) so I have every reason to support this view – but the reality is that it’s a ridiculous reason to explain away all that’s changed in the last 48 hours of global macro market news-flow.
Contrary to what you may be hearing parroted around the Street, I thought the economic news out of both Japan (+3.7% Q2 GDP) and Singapore (-8.5% non-oil exports) were more positive than negative. I thought the foreign direct investment drop in China (-36%) was more negative than positive. I am long China and short Japan. I have no room to infuse my personal confirmation bias into these economic read-throughs. They are what they are - no matter what my positioning.
If you wake up every morning looking for data points to support your portfolio’s positioning, you are probably not going to be a winner in this game over the long term. If you wake up chasing the SP500 to a new YTD high on Thursday (1,012), and scrambling to make sales this morning down at another higher-low (989) you are just going to frustrate yourself and your clients.
Have your own investment process. Make it malleable and repeatable. Buy low; sell high.
On Thursday, I sold my Freeport McMoran (FCX) and Southern Copper (PCU), then I shorted Apple (AAPL). Why? when everyone is chasing things in this tape, you have to find a way to focus your mind and book gains. You also have to be able to short other people’s hopes. You have to have the ability to maintain opposing thoughts in your mind and still fade the market. You have to find ways to win.
On Dollar down days, the Bankers, Debtors, and Politicians get paid – meanwhile American commoners and the Chinese government get plugged. One of the main reasons why the US stock market failed to make a higher-high on Friday was just that. The US Consumer gets this trade – he isn’t stupid. Friday’s Michigan Consumer Confidence reading flashed another lower-high, catching those who don’t get what the American consumer does off-sides.
This morning’s USA TODAY/Gallup Poll reveals that, “57% of adults say the stimulus package is having no impact on the economy or making it worse… 60% doubt that the stimulus plan will help the economy in the years ahead… 18% say it has done anything to help improve their personal situation…”…
As the US Dollar tested new YTD lows last week, the US stock market made new YTD highs. All the while, Chinese stocks started to fall. Again, this makes sense  - if you believe me that the Chinese don’t like this US Dollar Devaluation any more than the American Saver does.
Last night, the Chinese stock market got hammered, trading down another -5.8%. Since it peaked on August the 4th at 3,471, the Shanghai Composite has seen a -17% correction. Never mind a correction – for a country, that’s a crash!
So what to do here this morning? Run around like chickens with our heads cut off yelping for bananas? Uh, no – chickens don’t eat bananas. Let’s just take a deep breath, and remind ourselves that the Buck can start to Burn again just as quickly as it stopped going down. This remains the global macro trade that continues to matter. It won’t forever – but until forever comes, don’t fight it – capitalize on it.
I have immediate term TRADE downside support levels for the SP500 and Nasdaq at 989 and 1,965, respectively. Immediate term TRADE upside resistance for both US indices  is now 1,015 (SP500) and 2,019 (Nasdaq).
Best of luck out there this week,


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.

VXX – iPath VIX
As the market rolled over and volatility spiked, we shorted the VXX on 8/13.

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.