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“Well done is better than well said.”
-Benjamin Franklin
On Friday, I used a Thomas Jefferson quote. This morning, I figured I’d keep rolling out the red carpet for America’s men of character. With Washington’s politicians giving nothing but faint lip service to America’s Currency and Credibility Crisis, God knows we need some leadership and guidance.
Relative to the range of possibilities I had in my head going into this weekend’s G-20 meetings in Pittsburgh, nothing really happened. They talked about bankers bonuses. They talked about balancing fiscal deficits. They talked and they talked. They didn’t actually do anything…
At least, somewhere along the lines of his 3-days Smile and Nod meetings with the Chinese, President Obama was slipped one of our Early Looks on Chaos Theory (“Bridging Chaos and Hope”, 9/24) . Check out this prefacing quote from Obama himself: “Because our global economy is now fundamentally interconnected…” Nice!
So, no matter where you go this morning, here we are – right in the same spot that we started ahead of the G-20. While the US Dollar finally had an up week (its first in the last 4), closing up a paltry +0.5% at $76.81, it remains broken across all three of our investment durations (TRADE, TREND and TAIL). The US Treasury Secretary’s impact on global currency markets is basically negative at this point. That’s both embarrassing and sad.
So where do we go from here? Should we fire up the Crash Calling engines again – you know, the ones that seem to find their way into the daily double of CNBC’s manic news-flow every time the SP500 drops a percent? Or should we just take a deep breath, see this market’s current risk management setup for what it is, and deal with it?
Tobias Levkovich, a sell side strategist at a government sponsored bank (Citigroup), is calling for the SP500 to hit 1000 this morning. A perfectly round number… A perfectly useless forecast. There is a reason why most of the real Stock Market Operators in this business say that the sell side shouldn’t make “market calls” – it’s because they can’t!
President Obama is right. Managing risk in this increasingly interconnected global market of colliding behavioral and mathematical factors is the future of fiduciary responsibility. White House strategists, don’t worry – he didn’t say that specifically yet, but you can poach it from me. Other people are fine with doing the same.
After watching Brett Favre stick one in the back of the end zone yesterday with 2 seconds left to get the “W” for the Minnesota Vikings, I am inspired to make a call this morning. Into month end (Wednesday), I’ll take the other side of Levkovich.
Here’s my call:
1.      Two lines matter in the US stock market right now: SP500 support at 1035 and US Dollar Index resistance $77.61.

2.      If those two lines hold, there’s immediate term upside in the SP500 to 1060 and US Dollar Index downside to $75.81.

3.      If they don’t hold, you are going to see follow through selling in everything REFLATION trade, like you saw last week.

Ahead of last week’s -2.2% selloff in the SP500, it paid to proactively manage risk. We did that by doing what we call BETA Shifting DOWN as US and Global Equity Markets were getting overbought into a US Dollar getting oversold. Our Asset Allocation positioning included the following holdings next to a 47% position in US Cash:
1.      US Bonds 19% = TIP (Treasury Inflation Protected Securities)

2.      US Equities 6% = XLV (US Healthcare ETF)

3.      Int’l Currency 10% = CYB (Chinese Yuan)

4.      Int’l Equities 9% = EWG (Germany) and CAF (China)

5.      Commodities 9% = GLD (Gold)

We don’t own oil. We don’t own copper. In terms of Commodity exposure, we simply own gold, and that will not change this morning. We flashed this as last week’s Chart of The Week when it broke, and Dr. Copper remains broken from an immediate term TRADE perspective. That line in the sand is $2.85/lb. Copper was down -1.5% on the week last week, closing down for the 4th consecutive week, reminding us that owning anything China is riskier than it was when we bought China 9 months ago.
Critically, the price of West Texas Crude Oil broke both its immediate term TRADE and intermediate term TREND lines last week. Those lines are $70.83 and $68.94, respectively. While there is long term TAIL support in the $58/barrel range, there is absolutely no reason for me to buy back what I sold (USO) higher anytime soon. This is where you get paid to do nothing.
US Healthcare (XLV) was the best performing sector out of the 9 we follow in Howard Penney’s SP500 Sector Risk Management product on both Thursday and Friday. Meanwhile, Germany (EWG) is flashing what we call a positive divergence versus the rest of Europe this morning, trading up +0.7% after “Angie” (Angela Merkel) successfully won the election this weekend. The German election was one of Matt Hedrick’s major macro catalysts. Great call by our German speaking analyst.
On the International Equity side, I’ll be right on Germany and Japan this morning but wrong on China. Chinese equities got smacked last night, trading down a -2.7% on the Shanghai Exchange. Dr. Copper and China have very high positive correlation to one another in 2009. I should have sold my CAF when I sold Hong Kong (EWH).
“Shoulda, coulda, woulda”, as we ice men from Thunder Bay would say, doesn’t matter. “Better done is better than well said.”
Best of luck out there this week,


EWG – iShares Germany
Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats over the weekend. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. 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.

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. We like defensible growth with an M&A tailwind. 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.


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.