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“Circumstances rule men; men do not rule circumstances.”

-Herodotus

Unless you are Warren Buffett or managing your own money, odds are that you don’t own your own duration. Your investors do. In this Pressure Cooker of daily, weekly, and monthly returns, circumstances rule asset managers; asset managers do not rule circumstances.

Yesterday, I had some fascinating feedback about my views on Duration Mismatch (i.e. you can be the smartest human on the planet, but if you get the timing wrong, guess what? you’re wrong). I’d like to thank our exclusive network of subscribers for calling it like it is, away from their bosses, from their g-mail accounts. One thing is crystal clear - there is an increasingly pent up level of frustration in the institutional investing community when it comes to the rigid investment mandates of its employers.

Being rigid in a dynamic ecosystem like this interconnected global marketplace is not where you want to be. Being forced to be bullish or bearish will get you whipped around. While it’s implied that it’s difficult for investors to think outside the box when they have one drawn around their head, it’s equally problematic to be mentally inflexible when you actually have a flexible investment mandate.

One of the top stories on Bloomberg this morning outlines Duration Mismatch to a tee. You have some of the long standing pariahs of Macro alongside some of the up and comers battling The New Reality that markets can crash (versus consensus expectations) just as well to the upside as they can on the downside. You guys are all big boys – and at the end of the game guys, you know that the only thing that matters out here on the field is the score.

The score for the SP500 for the month of August had to frustrate the short selling community to the core. For the month of August, the SP500 was up another +3.4% taking Q3 to-date performance all the way up to +11.02%. Yes, those last 2 little basis points were especially for those who bought into the Great Depression narrative fallacy.

I certainly don’t profess to get it right all of the time. That said, I acknowledge that I am a player who passionately celebrates with his teammates when we score a goal. For whatever reason in this business you’re not allowed to celebrate. Why is pretty straightforward. Almost all of the time, a lot of people are losing.

We can explain our performance problems away with whatever storytelling we want. The odds are that the manic media will actually bite on the crutch. The New Reality remains however: Transparency, Accountability, and Trust will continue to extend its talons into asset management. The question of the next 3 years will be: What is it that you are doing with my money and why? Don’t make excuses – you get paid to make money or show me my redemption when you aren’t.

Making money used to be a lot easier when you were perceived to be a master of the hedge fund community and you were able to float something out into the marketplace, picking up a spread on information premium. Today, those margins are being clipped. There is no longer a premium associated with one’s assigned intellect. Global liquidity and information transfer have crushed storytelling.

Here’s a real-time example of what I mean. Yesterday, on multiples occasions I was flashed with notes insinuating that last night’s Chinese PMI (Producer Manufacturing Index) was going to be a bomb. I’d say that as early as 3-years ago, that might have actually scared me into selling my EWH (Hong Kong ETF). There is nothing that frightens me more than someone having inside information and committing capital to it.

Today, we have an office in Hong Kong and our own people and contacts on the ground. We’re not alone. Asset management supply has ramped massively in the last 3-years. If there’s a place where someone can get Research Edge in this world, they are probably there. The days of “I heard” this coming out of China or Japan aren’t over. They are simply being audited.

Last night’s Chinese PMI number ended up being the best number printed in the last 16 months! If the rumor mongering weren’t so pathetically predictable out there, it would be sad. AFTER Chinese stocks have corrected -22.7% from their YTD high, you have people coming out of the woodwork with stories that I couldn’t make up if I tried.

Fortuitously, we sold out of our Chinese local A-share exposure (last week) before yesterday’s -6.7% one day crushing. We remain long the Hong Kong ETF as we think the risk management setup in the H-share is more palatable given the meltup we have seen in global equity markets. On the actual news, the Hang Seng Index in Hong Kong traded up +0.75%. It is only -5.7% off of it’s YTD highs.

The rest of the economic news this morning in global macro is pretty much more of the same. There is plenty of lagging economic data in Europe (better than expected German unemployment at 8.3%, sequentially improved German retail sales, etc…) that paints the lines on this ultimate fighting field of daily risk management – the one that has been trading higher across equity, currency (ex-US), and commodity markets for the better part of the last 6-months. Markets looked forward, not behind.

Looking forward at the month of September, there is plenty to worry about. If you don’t wake up worried in this market, you probably aren’t awake. Be sure however to consider that crashes can occur versus expectations on both side of this ball. The Ball Underwater that I called out late last week is definitely in motion here. The US Dollar has stabilized and everything priced in Dollars is starting to pop.

I bought some of that bubbly oil back yesterday via the USO. It was down -4.5%. I have an addiction to buying things when they are red. It’s a personal bias and it can get me run over. Trust me, I get the drill.  Between now and the end of September, my goal is not to get run-over. That’s it.

I have immediate term TRADE downside support for the SP500 at 1003 and for the Nasdaq I’m looking at 1991. Could the immediate term highs for the year be in the rear-view? We will have to see, won’t we. Just remember that you don’t have to be bullish or bearish. You have to be right. Circumstances rule this game.

Best of luck out there today,

KM

LONG ETFS

USO – Oil FundWe bought USO on 8/31 near the lows on the day in oil. USO isn’t the perfect ETF, but this is the right price.   

 

XLV– SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. It’s a good one to buy into. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

 

EWH – iShares Hong KongThe current lower volatility in the Hang Seng (versus the Shanghai composite) creates a more tolerable trading range in the intermediate term and a greater degree of tactical confidence.

 

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.

 

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

LQD – iShares Corporate Bonds – Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates that bonds will give some of that move back. Shorting ahead of Q4 cost of capital heightening as access to capital tightens.

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

EWJ – iShares Japan –While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. 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.