Pressure Players

“Pressure is something you feel when you don't know what the hell you're doing.”
-Peyton Manning

The #1 headline on Bloomberg this morning is “Stocks Climb as Dollar Declines on Economy; Oil, Copper Gain”…
 
If you pressed your shorts yesterday and/or didn’t buy anything on US Dollar inspired stock market weakness (the USD was UP all day), you’ll be feeling some macro pressure in your portfolio today. US Dollar bearishness is definitely consensus now, but that doesn’t mean it can’t persist. We’ve seen the game tapes. We know how to manage this dominant risk.
 
In early morning trading, the US Dollar is getting smoked again, trading down almost a full percentage point right back down to its year-to-date lows. Lower-lows in the Burning Buck will likely equate to higher-highs in the US stock market. The Nasdaq already registered a new YTD high last night. The SP500 needs to close above 1068 today in order to register another win.
 
Winning is what accountable professionals who have a repeatable process do. Losers point fingers, and we are seeing plenty of those on Wall Street these days. In The New Reality of American Finance, losers can’t hide from the You Tube anymore. This is good. No more Wizard of Oz. The industry is evolving. This is long overdue.
 
Within 12 seconds of last night’s Monday Night Football game against Miami, Peyton Manning put a ball in the end zone and was up 7-0. Manning isn’t everyone’s favorite player in the league. Some of his quotes (like the aforementioned one) don’t make him everyone’s best friend either but, come Game Time, who really cares ? The man is prepared to play, at the highest professional level, every game of his life.
 
Only on Wall Street are you not necessarily allowed to behave like the professional athlete that you’d like to be. Particularly if you are on the “sell side”, you are supposed to be subservient, always reminding the “buy side” how “smart” they are. To some extent, this behavior is predictable. After all, the buy side pays the bills.
 
Having been on the buy side for almost a decade, and now spending some time selling my wares, I’d have to say that the long standing sell siders who haven’t evolved in this business should stick with that loser strategy. Hang on to the old dreams and commission streams boys. It’s all you can do.
 
What this industry needs is change, and a lot more of it. We want Pressure Players who aren’t sell side or buy side. We want Pressure Players who are delivering on the Right Side. If you wake-up every morning in this business under pressure to point fingers, as Manning would say, “you don’t know what the hell you are doing.”
 
Aggressive start to the morning Mr. Mucker? Yeah, that’s me. And I’m not ashamed of it. We wake up early here at Research Edge, expecting to win.
 
Back to our pre-game preparation. Most Portfolio Managers who continue to crush it in this New Reality of Risk Management know that preparing for this morning starts with all of the moves you made in your portfolio on the game day prior. Yesterday, in our Virtual Portfolio, I only bought and covered positions. I covered 3 shorts (CCL, AMZN and AAPL), I bought 1 country (EWG, Germany), I bought one Sector (SMH, Semiconductors), and I bought 1 stock (SONC).
 
Why buy/cover on red?
 
1.       The US Dollar was UP. Until buying/covering on USD UP days stops working, I’ll keep running the same play right up the middle.

2.       Volume was DOWN. Decelerating volume on market down days, and accelerating volume on market up days is bullish.

3.       Volatility (as measured by the VIX) remained broken across all 3 of my investment durations. PM’s still aren’t bullish enough.


Like a simple 3-hut count, and putting the ball down field for another 6 yard gain, that simple 3-factor model works. Until it stops working, why wouldn’t we just keep running the play?
 
We can get upset about the US Government Burning our currency. We can point fingers. We can even make excuses as to why all this can’t be a “fundamental” rally in the US stock market…
 
But that’s not going to change the score folks. It’s real-time, and it’s up on the scoreboard. Don’t complain about the weather or injuries. Just understand the game that you are in and deal with it.
 
This morning’s risk in the US stock market no longer supersedes the reward (it did yesterday). Today is a new Game Day. Today, the reward of going long outruns the risk. I have immediate term upside in the SP500 at 1078 (a higher-high) and immediate term TRADE downside support at 1054 (a higher-low). There is still 2.5 hours to Game Time. Let’s come out of the box with the confidence that all proactively prepared professionals should be playing with. Pressure Players expect to win.
 
Best of luck out there today,
KM

LONG ETFS


SMH – Semiconductor HOLDRs We bought the semiconductor index on 9/21. We see demand creeping back with the book-to-bill ratio breaking 1 over the last two months.

EWG – iShares Germany Chancellor Merkel has shown leadership in the economic downturn, from a measured stimulus package and balanced budget to timely incentives such as the auto rebate program. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy. Merkel looks to be in the driver’s seat for re-election on September 27th, while her coalition partners are less certain.

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.