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“Do not bite at the bait of pleasure, till you know there is no hook beneath it.”
-Thomas Jefferson
 
Among other things, Thomas Jefferson was an archaeologist, an architect, and a horticulturalist. He was a Macro Man, of sorts, who subscribed to a multi-factor model of self education. Per Wikipedia, “he idealized the independent yeoman farmer, distrusted cities and financiers, and favored states’ rights and a strictly limited federal government.”
 
As the 3rd President of the United States, Jefferson’s writings certainly left an impression on me. I think the man left one on a lot of other people too. Whether his vision of America fits into today’s Gong Show of American style Financial leadership is not clear. That’s sad.
 
When I write about the US Federal Reserve being as politicized as it has ever been, or when I chirp about the Hank Paulsonites at the US Treasury, I am not being politically partisan (remember, I am a Canadian hockey player!). When it comes to the perceived financial wisdom of this nation’s “leaders”, its not about Bush or Obama. It’s not about Republicans versus Democrats either. It’s about competence. It’s about being right.
 
Is it right to value a country’s economic health by measure of her stock market? Is it right to measure it by the value of her currency? Is it right to use one measurement and not the other?
 
In 2009, whether you came to understand the inverse correlation between America’s currency and everything priced in that currency or not, you are now forced to pay attention. From a macro perspective, this call makes or breaks your year. As the Buck Burned, now we know that US Debtors, Bankers, and Politicians got paid. Eventually, investors taking advantage of this twice in a 40 year US Dollar Sale did too. All the while, bullish or bearish, we all knew there was a hook.
 
What’s the hook? It’s Pleasure’s. Unless you are a reptile, it’s stored nicely right there in your thick mammal neocortex. When prices of things you own go up, you feel good. When those prices go down, you don’t. That’s it.
 
Now that the US Government has completely crashed America’s currency, you know the hook was America losing her credibility as the long standing fiduciary of the Global Financial System. How does that feel? Or does anyone’s limbic system feel that?
 
The headlines coming out of today’s G-20 meetings in Pittsburgh are going to be what the Germans, Chinese, and Russians make them. As I sit here and watch the replay of Timmy Geithner’s remarks, I am simply saddened. America’s voice of thought leadership in financial matters has been compromised and diluted. That’s the hook.
 
Pleasure’s Hook is the US Dollar. Since 2:45PM EST on Wednesday, post Ben Bernanke pandering to a Japanese style rate of return (ZERO), the US Dollar marked and rallied +1.5% from her YTD low. Over that same time frame, the SP500 has corrected -2.5%. That’s the hook.
 
To be clear, the US Dollar remains broken, across all 3 of my investment durations, and it will continue to be unless it can find some level of hope coming out of the G-20 that stops the Chinese from selling their credits. China is now The Creditor. America is the Debtor. That’s the hook.
 
Hope is not an investment process, so don’t bet on my selling everything I own (that’s priced in US Dollars), until the math tells me that the US Dollar has bottomed. This morning, after the Squirrel Hunter Secretary of the Treasury proclaimed his mystery of faith: “We expect, as I think countries expect around the world, the dollar to retain that position for a very long time”, guess what the Buck did? You got it – it Burned. It’s embarrassing.
 
Having met with plenty a Chinese business person, I will assure you of this. They will do a lot of 3 things in the next 3 days into and out of the G-20: 1. Smile, 2. Nod, and 3. Sell.
 
Sell? Sell what? The Chinese are a net seller of US Treasuries and US Dollars. This is something that anyone who isn’t paid to be willfully blind to the actual data knows. This is not good, but this is also not new. This Chinese stopped buying in Q1. They started selling in Q2. Since. Since March, the US Dollar has lost -15% of her value.
 
With the US Dollar Index trading down another -0.23% so far this morning (Germany’s Merkel comments pending), here are my levels on the US Dollar Risk Management:
 
1.      Immediate term support at the YTD low of $75.81. Immediate term resistance at my TRADE line = $77.53

2.      Intermediate term TREND resistance= $78.91

3.      Long term TAIL resistance = $82.79

 
So what do you do with these lines? Well, I wait and watch for the real-time US Dollar price to move around them. Then I manage risk accordingly. In hockey, my Dad called this “Read and React.” When the USD goes up like it did yesterday (+0.76%), I cover and buy stuff. When the USD goes down, I short and sell stuff. Some people call that trading. I call it Risk Management of my invested exposure. Johnny Keynes himself was a currency trader don’t forget.
 
Burning Man, US Dollar style, has plenty of unintended consequences. As the Japanese Yen hits new intermediate term highs (at 90.45 this morning versus USD), Japan’s bureaucrat bankers are managing a little risk for themselves. Some in Asia are calling this “repatriation.” Having been the poster child of currency carry trading abuse for lost decades, if anyone understands what happens to foreign fund flows into your country when you debauch your currency, its Japan!
 
Nomura, Japan’s largest banking/brokerage outfit, is ah, NO-MORa this morning! In one of the largest liquidity raises I have seen in a long long time, the Japanese bankers issued 800 MILLION shares (30% of the outstanding) to whatever lost soul had it in them to buy these shares last night. Nomura’s stock dropped -16% on the “deal”, leading Japan’s Nikkei to a -2.6% smack-down close overnight.
 
I know what John Mack at Morgan Stanley thinks about all of this. Check out the risk management of his resume as of late and, while you are at it, don’t forget that MS is part Japanese now too!
 
I wonder what Thomas Jefferson would think of Japanese style banking meeting the American kind that he never thought he’d see…
 
My immediate term risk/reward levels for the SP500 are 1045 (TRADE line support) and 1061 resistance. I’ll be selling into the strength associated with Pleasure’s Hook, at a price.
 
Have a great weekend with your families,
KM


LONG ETFS

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

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 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.