“Wake up and smell the cat food in your bank account.”
-They Might Be Giants
At 82 years old, this isn’t Paul Volcker’s first rodeo. Tonight, you can see him interviewed by Charlie Rose on PBS. If you care to see whose US Government views are most closely aligned with ours, these are the ones to hear out. I don’t hear them often.
I’ve called it Squirrel Hunting. Volcker calls it “Herding Cats.” If you have tried either (or observed some squirrely neighbor doing the same), you get the point. With a preview of tonight’s interview in hand, here are Volcker’s 3 main points:
1. China is the Creditor; America The Debtor - “You cannot be dependent upon these countries for three to four trillion dollars of your debt and think that they’re going to be passive observers of whatever you do,” Volcker said.
2. The Balance of Power in Global Financial Leadership is shifting – “symbolic of the relative, less dominant position the United States has, not just in the economy but in leadership, intellectual and otherwise,” Volcker said.
3. Credible American Economic Leadership requires competence, not politicization – “I would like to think that given the history of the past, given the strength, actual and potential of the American economy, we can still provide a kind of indispensable element of leadership here,” …“But it’s not going to be dictatorial, I’ll tell you that. It is very hard to herd these cats together.”
Call it irony or not, Paul Volcker’s views as Chair of the President’s Economic Recovery Board have been largely muted. President Obama’s Administration is much more comfortable with the Hope Model of prancing around his compromised and conflicted Chief Squirrel, Tim Geithner. Larry Summers then backs Timmy’s views, sometimes, by alluding to what he and his yes Lady, Christina Romer (Chair of the Council of Economic Advisors), call “blue chip estimates.”
“Blue Chip”, you know, as in Wall Street forecasts! After what we have gone through in the last 18 months, the US Government’s full faith and credit in these estimates is that smell of cat food in your bank account.
With all due respect to their theoretical wherewithal, I was raised by a firefighter, and you don’t bring a college professor into the world’s most interconnected risk management fire. When this thing is a blazing, check the theories and cats at the door. When it’s time to go through that burning door, I want someone who has been in a fire before. If America has that someone, it’s Paul Volcker.
Volcker gets it. China gets it. The Germans are getting it. So how in the world are we going to herd these American cats and squirrels? Sadly, unless we start evolving the thought process, I don’t think I have an answer to that question that is any more theoretical than what Romer espoused at Berkeley.
Back to the fire…
Yesterday, we scored one for America’s team, putting a ball in the end zone against the Crash Callers. The Citigroup watch-out below for 1000 on the SP500 was a “call” that was to be capitalized on, offensively.
Yesterday’s meltup in the SP500 was a nifty +1.8% daily move, wiping out almost all of last week’s losses, taking the short squeeze of a generation back up to a +57.1% gain from the March 9th closing lows.
Yesterday’s rally was not supported by accelerating volume studies however, and that makes this morning all the more interesting – as all fires are. So let’s strap on the cat herding gear and our masks and get into it. Here are some critical US market factors to consider before the door opens:
1. SP500: Immediate term TRADE support = 1045
2. SP500: Immediate term TRADE resistance = 1077
3. Risk/Reward (daily) for the SP500 is balanced; stay hedged
4. Top to Bottom probability studies (weekly) for the SP500 is 33 points; that’s tight and trade-able
5. VIX (Volatility): downside support 22.63; upside resistance at the intermediate term TREND line is 26.31
6. Breadth: for the 11th consecutive day, 9 out of 9 sector views in our SP500 model remain bullish TRADE and TREND, but at a price
7. Yield Curve: 10-year yields minus 2-years continue to compress this morning at +232 bps wide (narrowest in 6 months)
8. US Treasuries: the Fed continues to keep money on the short end free (0.10% for 3-month UST; we are Japanese)
9. US Dollar: up small this morning to $77.11 and +1.7% from last Wednesday’s low; TRADE line resistance = $77.39
On the global macro country heat map, here are some critical factors to consider:
1. Japanese equities have broken their immediate term TRADE line and are now threatening a TREND line breakdown
2. Chinese equities closed down another -0.33% overnight, making it 3-days in a row, ahead of the 60 year Revolution party at week’s end
3. Hong Kong closed up a strong +2.1% leading the rest of the Asian equity market higher overnight (Taiwan +2%, Australia +1.5%, Indonesia +1.9%)
4. Russia cut interest rates for the 7th time since April, taking them down from 10.5% to 10%; Russian equities moved higher on that to +99.8% YTD
5. Romania cut interest rates from 8.5% to 8%, but their yields remains the highest in the European Union next to Hungary at 7.5%
6. Brazil is backing off their stimulus plan, and the Bovespa continues to hang out near the YTD high of +64%
Meanwhile in Commodities, we continue to see a worrisome breakdown in both copper and oil prices. West Texas Crude Oil is broken from both an intermediate term TREND perspective and an immediate term TRADE perspective, whereas Dr. Copper is holding his TREND line support of $2.58/lb after breaking his TRADE line of $2.85/lb. The only commodity exposure we have in the Asset Allocation model remains gold, which continues to hold what we call a Bullish Formation.
What does all of this mean? I can tell you what it doesn’t mean. There is no herding cats or hope in this global risk management process. And while hope is not an investment process, that’s all I have left for our President to hear when Sir Paul Volcker is aired with Charlie Rose tonight.
Best of luck out there today,
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 — 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.