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“One of life’s most painful moments comes when we must admit that we didn’t do our homework, that we are not prepared.”

-Merlin Olson

Same jersey for 15 years in the NFL. Same process every day. Same expected results. Merlin Olson played for the Los Angeles Rams for all 15 of those years. He made it to the Pro Bowl in every year but his last. He never missed a game.

For those of you who have played competitive sports, you know how impressive this man’s tolerance for pain must have been. Every morning, his feet were on the floor, expecting to play. No days off. No excuses. He was prepared for pain.

While we get compensated like them, we generally do not attack the professional game of investing like professional athletes do. Rarely, if ever, are our every moves You Tubed by an instant replay. This, of course, presents our daily exercise of debunking global macro a tremendous opportunity to be transparent.

A lot of people are giving lip service to transparency right now. They should. It finally matters. In principle, transparency is what is going to matter to The Client in this business going forward. Whether that Client is China or a high-net worth American, you had better do your homework or be prepared for pain.

What is it that you do? That’s the most relevant question of asset management for the foreseeable future. This market’s generational short squeeze is going to expedite The Clients getting some answers. We, as an industry, are evolving. This is good.

In the aftermath of Bernanke pandering in Jackson Hole on Friday and continuing to Burn The Buck, the US stock market hit another YTD high. At 1,026 in the SP500 we are now staring at a +52% rally from the March 9th, 2009 low. Let’s think about that return again: +52%!

In The New Reality, fact based context is going to be critical. While the manic monkeys made up stories as to why we were going to crash every day that we were down in the last 4 months, guess what – we didn’t. The only larger modern day stock market move that the Americans have seen since this +52% rally, was the crash of 2007-2008. That move was -57% from the peak. There is now only a 500 basis point spread between these two crashes versus consensus expectations. For some, both were painful.

The beauty of this game is that it waits for no one. The global market couldn’t care less if I’d like to spend time on the beach with my family. It is as interconnected as it has ever been, and it will mark itself to market every day. Per some pundits, China was “crashing to a bear-market low” – until we saw a cumulative +7.2% three-day move come with last night’s Shanghai Composite Index close, that is…

In the US, I hear a lot of talk about “low volumes”, but that doesn’t do The Client any good. In fact, that excuse, when considered next to the actual score of the game, has no relevance to The Client whatsoever. It’s an excuse. Can you imagine Merlin Olson explaining away the last game of his career (the NFC Championship game at Minnesota in 1976) as weather or volume related? C’mon, let’s get real here. By the way, Friday’s new high came on accelerating daily volume (+11% versus Thursday’s volume).

The New Reality remains. In the immediate term, when the US Dollar goes down (like it did on Friday), everything priced in those Dollars will continue to go up. In 6 out of the last 7 weeks, the US Dollar has been down. In 6 out of the last 7 weeks, the SP500 has been up. There is a deep simplicity to chaos theory. That’s math, not fiction.

Dominating inverse correlations in global macro like this aren’t perpetual. But you will experience the Pain Trade if you claim that they don’t matter while they are dominating. Understanding that when it’s sunny out, some people in this business will still say it’s raining. That is what it is. There is very little responsibility in recommendation any more.

Goldman Sachs is getting a little ribbing from their pals at the WSJ this morning for giving “tips” to preferred clients in what Goldman calls their weekly “Trading Huddle.” As with everything the house of the Almighty One creates, I am certain that there is a perfectly theoretical explanation for this. Rather than whine about it this morning, just look at their “conviction” buy list versus their other “buys” for what they are – this is what they do.

What I do is show everything I do real-time. No, there is no super secret sauce associated with my playbook. Every sale that I made into Friday’s strength (Germany (EWG), Canada (EWC), Healthcare (XLV), etc…). Every sale was probably a little early. Every time stamp is up there on our portal. It ticks, like a game clock and the score should.

What is it that I’ll be doing this morning? More selling. No, not because a squeezed man named Roubini is reminding me of some “L” or “W” shaped economic pattern. I’m selling because I know the value of realizing victory. I know the difference between a real W or an L. And I don’t need the other team’s “trading huddles” to give me a conviction play versus every other play I plan on running.

We’ll be running it straight up the middle this morning - selling and preparing for pain. The SP500 will be overbought as we approach my intermediate term TREND target of 1,041.

Best of luck out there this week,

KM

 

LONG ETFS

EWZ – iShares BrazilPresident Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

 

XLK – SPDR TechnologyTech 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.

 

QQQQ – PowerShares NASDAQ 100We 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.

 

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

 

XLP – SPDR Consumer Staples – We shorted XLP on a bounce on 6/21. One way that investors chase a bearish USD is buying international FX leverage in global consumer staples. Shorting green.

DIA  – Diamonds Trust- We shorted the financial geared Dow on 7/10, 8/3, and 8/21. 

 

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.