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“Tactics without strategy is the noise before defeat.”
-Sun Tzu
 
I’ve used this quote before. It’s one of my favorites. It’s taped on the insert of my trusty strategy notebook above a Sports Illustrated picture of one of my favorite winners in life, Tiger Woods.
 
Yes, I still use scissors, tape, and foil – ole school hockey (kidding about the foil). I have a cut out picture of Woods from the June 23, 2008 cover of SI, wearing his Championship Day red jersey, gritting his teeth, and pumping his fist, on a bum knee. The title says, “The Hard Way.”
 
What does Sun Tzu have in common with Tiger Woods? What role do tactics, strategy, and process play on a field of competitive battle or in your portfolio? Everything.
 
Yesterday’s SP500 close of 1052 was not only a higher-year-to-date high, but a stiff reminder that 55% moves in the US stock market can come The Hard Way. In 23 months, the SP500 has had a peak-to-trough crash of -57% and a trough-to-peak rip of generational proportions (+55%) to the upside.
 
No matter where you go this morning, there’s that score. It’s behind you. Today you are tasked with setting yourself up to earn an absolute return tomorrow. Whether you came out of this a winner or a loser, you surely gleaned something from this experience. I certainly have. Managing risk in an increasingly interconnected global marketplace of colliding macro factors can only be done one way – The Hard Way.
 
The Easy Way is to blame missing the market’s -57% collapse on Dick Fuld. The Easy Way is to blame missing the market’s +55% meltup on a Great Depression. The Hard Way remains not being beholden to your super “smart” friend’s consensus “ideas.” The Hard Way is beating your own path towards a repeatable investment process.
 
Last night, as I was flying back to New York I couldn’t help but appreciate the beautiful sun setting over the NYC skyline. One year after all of the noise, we can see who has been defeated. In hindsight, losing strategies are as crystal clear as a US Dollar inverse correlation.
 
I was meeting with investors in both Winston-Salem and Raleigh, North Carolina yesterday. On my flight home, I thanked God for having helped build a firm that provides me the opportunity to have constant investor feedback. If there is a variant view in the marketplace relative to the position I have taken, trust me, I see it. This has shown me that there is an Easier Way to win in this business. Being at the hub of an exclusive information network provides for better risk management.
 
As I look at this morning’s global macro setup and how it is most likely to translate to the US stock market, surprisingly, it’s more bullish than bearish. If I wanted to wake up trying to be a contrarian every morning, I wouldn’t allow myself to write that. Again, I have learned The Hard Way that being a mental mule doesn’t work.
 
So what’s changed? What’s working? What has my daily read-through make that call?
 
1.      The Buck continues to Burn (trading down another -0.34% this morning to another lower-low at $76.28)

2.      The SP500’s higher-high yesterday came on ACCELERATING daily volume (in the last 3 weeks, volume studies have been bearish)

3.      The VIX (volatility) remains broken across all 3 of our my investment durations (TREND line = $27.06; no support until $21.69)

 
Now that’s a simple 3-factor model, but it’s one that can dominate for longer than the super duper short seller can remain solvent. While I do think that a breakdown below the $74 level in the US Dollar Index puts this country’s citizenry (ABC/Washington Post Consumer Confidence dropped again last night to -49) and balance sheet in crisis mode again, until I see those real-time market prints, all I have is the monkey trade continuing (Dollar DOWN = everything priced in Dollars UP).
 
Three weeks ago, this 3-factor model gave the US market a head-fake (USD up + VIX up + accelerating stock market volumes on down days). That 4-day -3.5% selloff in the SP500 has been revealed as noise. The strategy that matters now is what has mattered for the last 6 months. Generational levels of groupthink (bearishness) are breaking down volatility as volume accelerates alongside everything priced in US Dollars making higher-highs.
 
So what are my immediate term TRADE risk management levels?
 
1.      SP500 support = 1029; resistance 1068

2.      Nasdaq support = 2047, resistance 2139

3.      Dow support = 9517; resistance 9778

 
So what if you don’t manage risk, daily? What if you don’t overlay the immediate term TRADE with an intermediate term TREND duration? How do you measure long term TAIL macro risks? What are your macro calendar catalysts - Fed Meeting next Wednesday? G-20 meetings next Thursday? Does macro matter?
 
These are all tactical and strategic questions that I try to find better answers to every day. The Hard Way is being mentally flexible enough to evolve.
 
Best of luck out there today,
KM


LONG ETFS


GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

FXC – CurrencyShares Canadian Dollar With the USD continuing to Burn we added to our International FX exposure (we’re also long the Chinese Yuan) on 9/14 via the Canadian Dollar.

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 Kong The 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.  

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.

 
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.

EWU – iShares UK We’re bearish on the UK’s leadership and monetary policy to weather its economic downturn. Although we’re seeing improved fundamentals within the country and across Europe we continue to see the country’s financial leverage as a headwind and increasingly the data suggests that inflation is getting ahead of growth. With the FTSE reaching a YTD high on 9/9, we shorted EWU.

DIA  – Diamonds Trust We shorted the Dow on 9/3.  In the US, we want to be long the Nasdaq (liquidity) and short the Dow (financial leverage).

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.