“A man’s feet should be planted in his country, but his eyes should survey the world.”
-George Santayana
Although he was considered an American essayist, George Santayana spent only 39 of his 89 years living in America. He was born in Spain and he, like many global macro investors of today, spent a lot of time surveying the world.
While it’s very difficult for most US centric investors to get away from the glaring levels of groupthink associated with everything that dominates the news flow of their day, that’s definitely a reality that you should be capitalizing on. Wake up in the morning with a global macro process. Give yourself a competitive edge.
After a 2-day -3.3% low volume correction in the US stock market, you saw plenty of pundits calling for another crash last night. I’ll save the crackberry analysts on Fast Money the embarrassment and not call them out by name. One of those guys is having enough problems with basic pronunciation. It’s China – not “Chinarr.” It’s called a correction, not a crash…
Until we have replaced the CNBC crash calling with a basic understanding that we call these small percentage moves off of higher-YTD-highs, corrections, this US stock market will continue to set up to make higher-lows. Buying Thursday’s highs and selling yesterday’s lows is going to simply expedite the long overdue exit of irrational supply from this US asset management marketplace.
Back to the global marketplace, no you aren’t hearing much about yesterday’s nonsensical “Japan was weak” narrative this morning. Why? Well, probably because Japan wasn’t down last night. One factor model (price momentum) investing has its challenges. You are perpetually chasing price.
In Asia, we saw both Hong Kong and China put on +0.84% and +1.4% stock market moves, respectively, after Hong Kong posted an improved employment picture. At 5.4%, not only is the unemployment rate nominally low to begin with, but it stopped going up sequentially. This, on the margin, is better than bad. We still saw some follow through selling in Taiwan (-2.1%), Indonesia (-2.1%), and the Philippines (-1.4%)… and that’s less than great… but don’t forget how much most of these Asian stock markets are up YTD. Again, it’s called a correction, not a crash…
In Europe, we’re seeing a solid rebound from the 2-day correction after Germany posted one of the best country confidence readings that we have seen in global macro for 2009. Germany’s ZEW Index (economic sentiment) shot straight up to 56 for the month of August. That report was 39.5 in July. This report was the best sentiment reading for the Germans in over 3 years. We’re long Germany via the EWG. Yesterday’s selloff in the German DAX index is called a correction, not a crash…
In Commodities, after hitting a new YTD high on the same day that the Chinese stock market hit hers (August 4th), the US Dollar up move equated to another -1.6% correction in the CRB Commodities Index yesterday. Not surprisingly, two of global macro’s leading indicators (oil and copper) are rallying this morning as the US Dollar stops going up. A 2-week -6% down move in the CRB Commodities Index from its YTD high is called a correction, not a crash…
As the perceived safety trades for US centric investors (US Dollars, US Treasuries) sucked people into buying them high yesterday, I am going to remain on the other side of both of those ideas. Buying things that are actually crashing when they rally to lower-highs is what plenty a smartest fund master of the universe tried last year. It’s called averaging down – and until you can find a bottom, it doesn’t work.
So what am I doing now? Watching… I did my buying yesterday (covered the AAPL short, bought FCX, bought XLB, etc...). The last thing I am going to do is buy them today on the way up. While I don’t think its that generational of a mind shift to be buying low and selling high, I can assure you that it’s currently not a consensus strategy. Why? Primarily because the clients don’t let US centric managers invest that way right now. Durations have been shortened and emotions have heightened, as a result.
Hong Kong (Hang Send Index), London (FTSE), and New York (SP500) are all holding comfortably above their respective immediate term support lines this morning. Those risk management lines are 19846, 4547, and 972, respectively. As I survey the world this morning, I see that 3-factor setup as bullish. What you have seen so far is called a correction, not a crash…
Best of luck out there today,
KM
LONG ETFS
XLB – SPDR Basic Materials — We bought XLB into a -4% down move on 8/17. As the USD continues to burn we want to long its inverse correlation to Basic Materials.
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 Fund—We bought USO on 8/10 and 8/17. As the Buck breaks we want to be long oil.
QQQQ – PowerShares NASDAQ 100 — We bought Qs on 8/10 and 8/17 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
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.
