Stockhausen

“Whenever I felt happy about having discovered something, the first encounter, not only with the public, with other musicians, with specialists, etc, was that they rejected it.”
-Karlheinz Stockhausen
 
Like our Chief of everything German here at Research Edge (Michael Blum), Karlheinz Stockhausen lived on the Edge of Chaos. Stockhausen passed away at the end of the US Economic Leverage Cycle (December 2007) and left this world as one of the most controversial, yet acclaimed, composers of the last century.
 
Whether it was Stockhausen’s musical theories of the 1950’s and 1960’s (electronic music), or those that we are defining in the 21st century of real-time finance – to me, it’s all the same thing. It’s about discovering and evolving. Every day, our profession’s challenge is to unlearn and re-learn.
 
How does Chaos Theory apply to financial Risk Management? How did Stockhausen’s Spatialization Theory apply to the proceeding 60 years of music? The answer to the 2nd question is much clearer. Looking backwards is always crystal clear, indeed…
 
After the SP500 closed down for it’s first day this week (down -0.31%, on decelerating volume, to 1065), I don’t think Stockhausen himself could have a more linear composition for Stockperformance. If you think that lyrical play on words was cute, you should see an ex-hockey player dance…
 
Perfectly linear performance? Here’s the score:
 
1.      Bears: October 2007-March 2009 = -57%

2.      Bulls : March 2009-September 2009 = +57%

 
So, lets dance.
 
Peter Schiff, Nouriel Roubini, and David Rosenberg. I am calling you all out on the dance floor. Let’s do it – in New Haven, CT, Stockhausen style.
 
Having done a reasonable job from the Top, to the Bottom, and Back Again, Research Edge is now taking ownership of this investment strategy debate. Someone has to be the auditor of this Gong Show. In 2009, all 3 of you gentleman have proven to be demonstrably reckless with the volume of your storytelling. Your timing in particular has been way off pitch. So let’s grease up those squeaky Depressionista wheels and have a little accountability session. I’ll host it. Nouriel, I’ll get you back onto Yale’s campus again, don’t worry…
 
Stockhausen said, “what is important is neither linearity or non-linearity, but the change, the degree of change from something that doesn't move to other events with different tempos in particular.” So, that’s going to be debate topic #1 – how do you, the other musicians of CNBC and the like, Wall Street “specialists” if you will, think about changes on the margin? Do they matter? When? Why? Let’s take the validity of this profession up a notch and debate the basic answers that anyone with a repeatable investment process should have.
 
Then, for debate topic #2, we can dig in maybe to Stockhausen’s thoughts about style and duration: “there is a personal sense of style for a given work - I don't like a general style, but every work has its own style, and I want to create a style for every work.”
 
Finally, I’d love to submit topic #3, which is more of a Stockperformance idea I have… which is simply how we should hold ourselves – you know, the “specialists” of calling markets, accountable for what comes out of our mouths and fingers. As Stockhausen said, “I'm always interested when other musicians are trying to discover new worlds of sound.”
 
Throw me some dates boys. My dance card is wide open. I already have a few major media sponsors lined up for the event.
 
My immediate term TRADE support/resistance levels for the SP500 this morning are now 1044 and 1076, respectively. Yesterdays intraday selloff in US Equities was inspired by an intraday bid for the bombed out US Dollar. If the Buck stops Burning, most things priced in Bucks will stop going up. This we know. What we don’t know remains – and if we think we discover something, we should embrace that “first encounter, not only with the public, with other musicians, with specialists, etc.”, especially if they reject it.
 
Have a solid weekend with your families,
KM


LONG ETFS


CAF – Morgan Stanley China Fund A closed-end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the more volatile domestic equity market instead of the shares listed in Hong Kong. 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. Although this process will inevitably come at a steep cost, we still see this as the best catalyst for economic growth globally and are long going into the celebration of the 60th Anniversary of the People’s Republic.

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.   

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. We shorted EWU on 9/9.

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.