“In questions of science, the authority of a thousand is not worth the humble reasoning of a single individual.”
-Galileo Galilei
On this day in 1846, the planet Neptune was officially recognized. Rather than through basic observation, this was the first planet revealed by mathematical prediction. Galileo, of course, “made the call” in discovering Neptune, albeit as a star, almost 250 years earlier.
I like math. I like science. I love my wife. I don’t like people who trade on inside information. I don’t like consensus. I don’t like the perceived “authority of a thousand” modern day financiers.
In print at least, I’m rarely accused of being humble. And I probably won’t be a candidate to lead the National Groupthink Convention as their key note speaker either. I am who I am and very comfortable with it. I’m in it to win it every day for both my subscribers and hard working teammates. Every morning. Rain or shine.
I had to get that off my chest this morning. Once in a while I get a note from someone who is on the other side of an investment position as me who says they don’t like what I have to say because I “go at other people” or “call people out.” Only on the professional field of Wall Street would these tactics by which a strategist attempts to conquer be misconstrued for something other than a will to prove he is right.
Yesterday, we were right. But it no longer takes the Father of Science to figure out the dominating mathematical inverse correlation between the US Dollar and everything that’s priced in US Dollars.
Yesterday, the SP500 hit a higher-high for the year-to-date, and the US Dollar hit a lower-low. Since March, the US Currency has crashed (down -15%), and US Equities had the most expedited REFLATION in a generation (up +58%).
Yesterday, Marc Faber of the Gloom Doom and Boom Report, explained the Burning Buck thesis to Bloomberg: “where there is inflation in the system as defined by money supply growth and credit growth, you have currency weakness… stocks can easily go higher. If you print money, they can go anywhere.”
Today, despite my respect for the investment strategy works of Marc Faber, I am asking myself whether what I don’t like (consensus) is staring me right in the face.
Today, I am asking myself why not sell everything?
Today, I am asking myself 30 different ways how I can be wrong tomorrow.
Today is not the day that you are going to see how hard I am on myself.
Today is one more day where I wake up to make the risk management call.
Today’s setup in the US Equity market is as follows:
1. The immediate term risk/reward in the SP500 has moved back to neutral
2. Immediate term support for the SP500 is 1058 and resistance 1080
3. The daily range I see in my probability model is 43 SP500 points wide; perfectly tight and tradable
4. The Volatility Index (VIX) remains broken across all 3 of my durations, with the TRADE line being $25.14
5. Volume studies flashed bullish yesterday with daily volumes accelerating on the up move
6. US Market Breadth remains perfect, with 9 out of 9 SP500 Sectors flashing bullish on both TRADE and TREND
Globally, the setup is marginally less positive versus yesterday:
1. America’s Creditor (China) doesn’t get paid with the Buck Burning
2. China was down -1.9% overnight, breaking the immediate term TRADE line on the Shanghai Composite of 2908
3. Taiwan, Korea, India – they all closed down, after the US market hit a new YTD high. Is Asia leading us, or are we leading them?
4. Dr. Copper backed off his immediate term TRADE line, and hard – that line = $2.85/lb
5. Oil continues to impute political power to the likes of Putin; the Russian stock market is up another +1.4% this morning and now +101% YTD
6. The US Yield Curve compressed overnight (10’s to 2’s) to 244bps wide; still great, but not as great as everybody and their brother upgrades Goldman
The global macro catalyst that matters this morning is the Fed’s meeting. The US Treasury market might be smoking Bernanke out of his hole ahead of his commentary. I’m seeing 2-year yields breakout above my immediate term TRADE line of 0.99% to +1.02% and climbing. That’s a 1 month high.
If, Bernanke sees the recession “very likely” to be over…
If, Bernanke will see what I see coming in Q4 reported inflation accelerating…
Then, what will the US Currency and Treasury markets do?
This could get interesting. Then again, it always is. That’s why I love this game. I love making the call.
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.
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
FXB – CurrencyShares British Pound Sterling — The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 9/22.
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.