“Dream as if you’ll live forever. Live as if you’ll die today.”
-James Dean
Fatally dying in a car crash at the age of 24, James Dean lived a very short, but influential life. Dean’s life reminds me that risk management starts when I get in the car every morning. Penning my morning missive doesn’t happen in a vacuum.
When some people in this business think of risk management, they don’t think of their returns dying today. Some hope. Some dream. Some wakeup having made so much money that they are numb to the mortality of living a life levered long.
I wake-up at 4AM. I fill my thermos with coffee. I play the macro game that’s in front of me.
I don’t need to be bullish. I don’t need to be bearish. I don’t need to crash.
Today starts with yesterday. My feet are on the floor early. My coffee tastes the same. On 9/24 I called it an Outside Reversal. Today, I’ll call yesterday a major immediate term TRADE line breakdown. Combined, these two mathematical realities are bearish. If you’d like to dream that a +58% rally from the March lows is going to live forever, dream on…
The SP500 is -4% off its 2009 YTD high, and Japan’s Nikkei is down -4% in the last 48 hours. The two largest cars in the world’s economy (USA and Japan) have just had immediate term price momentum car crashes. Now is not the time to “buy and hold.” Now is the time to proactively prepare for potential collateral damage…
In “Rebel Without a Cause”, James Dean played a teenager with some serious angst. Don’t be that teenager this morning. Be an adult. Remove the emotion, and deal with the risk management lines that matter:
1.      SP500 immediate term TRADE support is now resistance at 1040 (Nikkei TRADE line resistance is up at 10,343)

2.      SP500 intermediate term TREND support is down at 981; that’s -4.7% lower and in play for the 1st time in 13 trading days

3.      US Dollar immediate term TRADE resistance = $77.24; support is at a higher-low = $76.08 (higher-lows of support for the Burning Buck is brand new)

Before they came public, some of the Partners at Goldman would ask, “can you make money by yourself, alone in the room?” That’s a really good question, and whenever I am on a bad performance run, I always ask myself the same…
If you were to lock me in a room and only give me one live market quote that I could use to manage the risk associated with the US stock market, it would definitely be that of the US Dollar.
What if the Buck stops Burning? What happens to all of the REFLATION trades? Well, rather than have a qualitative discussion about this, let’s look at yesterday’s math:
1.      The US Dollar was up +0.71%

2.      The SP500 was down -2.6%

3.      The SP Sector Financials (XLF) were -4.4%, and Basic Materials (XLB) -3.9%

There’s your risk. Car crashes are easy to see after they occur. Everything Burning Buck has been a buoy for everything priced in those bucks. Whether they be the US Dollar denominated toxic debts or Dr. Copper’s leverage to a down Dollar’s price, it’s all one and the same. If you want to play chicken with this next oncoming car, go right ahead. But I am warning you that objects in this inverse correlation’s rear view mirror are much closer than they appear.
Other than ultimately ending this non-scientific Greenspan/Bernanke Doctrine of ZERO percent returns on the savings accounts of this country’s citizenry, what else can get the Buck to stop Burning?
1.      The Fed’s Balance Sheet: it stopped going up this week! That’s the 1st week in the last 8, dropping by -$17.6B to $2.14 Trillion

2.      Federal Reserve Hawks: add Richmond Fed Head, Jeffrey Lacker, to the growing list of those who have made US$ bullish comments in the past week

3.      Unemployment: something better than a jobless recovery is Buck Bullish

But my oh my, Keith – ‘some of these things just won’t be good for my equity portfolio tomorrow’… or will they be?
We live in a time where we submit that crashing our currency is going to end well. We live in a time where we calculate the health of the economy using the price of a stock market. We live in a time of US Equity centric bull market dreamers….
It’s time to start living for our clients, as if the returns associated with a Burning Buck of the last 6 months can die today.
It is said that James Dean’s last words were, "That guy's gotta stop… He’ll see us…”
Mr. Macro Market doesn’t need to see any of us, and he crashes versus expectations, both ways…

Best of luck out there today,




EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. 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.

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.

USO – US OIL Fund We shorted oil on 9/30. The three Fed Heads just put rate hike rhetoric right on the table. If the Buck stops Burning, Reflation stops working.

XLP – SPDR Consumer Staples Looking for low-beta short exposure to US Consumer spending. Consumer Staples short interest is low, and the stocks are over-owned.  

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.



LVS is considering cutting a show from the Venetian: Cirque du Soleil’s Zaia. “Well-placed sources” are cited in saying that a year-end closing in a possibility for the show.  DM believes that the move would amount to giving up too soon on a big audience that Zaia could begin to draw once the brand develops.  City of Dreams is preparing to launch its own show in the near future.




Viva Macau is looking to fly directly into Melbourne, should negotiations with the Victorian Government and Melbourne airport go smoothly.  The airline is also talking to other Australian cities about establishing direct flights from Macau in place of the proposed Macau-Melbourne flight.  Government officials in the State of Victoria are pushing for the Macau-Melbourne route to go ahead. The direct route would allow Crown to attract high rollers to its recently opened City of Dreams casino in Macau from Melbourne.

Unemployment is a disaster. Why is the market surprised?

Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


Our model portfolio is limited to investments in the securities universe. This is by design, since the majority of investors in the US do not actively participate in the futures, physical commodity or spot currency markets and a founding principal of our firm was to make our work accessible and useful to investors of all types. As a result, we deploy our investment ideas in the non-security markets via ETF and ETN products, many of which have structural features that can be non-intuitive. We have recently received a number of inquiries regarding the products that we use to gain exposure to oil as a commodity.


The two most liquid products are the United States Oil Fund, and ETF that trades under the ticker USO, and the iPath Oil ETN, which trades with the symbol OIL.


USO, as an ETF, is a company that holds futures contracts on oil (primarily front month NYMEX and ICE contracts) as well as swaps and treasuries. The fund presents exposure to oil that can be traded like a stock inside a securities account. From a tax perspective, the fact that the company issues k-1 created tax complexities for some holders. OIL, on the other hand, is an Exchange Traded Note that provides a potentially simpler tax scenario for investors, but which also creates credit risk on investors since it is ultimately a debt security issued by a division of Barclays.


The chart below illustrates how significantly both products have underperformed the continuous front month contract for NYMEX Light Sweet Crude year-to-date  --the benchmark they were created to emulate.




This divergence is a result of a structural feature: While the continuous front month contract is calculated hypothetically, both USO and OIL must roll into successive contracts on a monthly basis to replicate the economic exposure. As a result, period of steep contango –such as the market experienced during the start of the year in the wake of collapsing prices, will have a negative impact on USO and OIL as they roll into newer, more expensive contracts.  In the charts below we illustrate the steep maturity curve which created a divergence in returns.






As the curve steepness moderated, the products began to trade with a close correlation again with an underperformance factor “baked in” going forward (unless of course the curve inverts, creating positive divergence for holders of USO and OIL).


We strive to provide actionable tactical ideas in our model portfolio and, as such, the liquidity of these products and near term correlation to front month futures makes them the best tools available. For subscribers who execute in non securities markets, either spot, futures or OTC swaps or for those who have a different investment duration than that of our model portfolio, these ETFs and ETNs may not be the best option.



Andrew Barber



Bear Cubs

Headwinds Ahead for the Eurozone


As we have measured the health of the European patient this year, we’ve anchored our thesis on a critical catalyst: employment.  We’ve held that Eurozone unemployment would rise into year-end and next year and that would create a grave headwind for the improving fundamentals that we’ve seen across multiple metrics and contribute to economic divergence between individual countries over the intermediate term.


Today Eurostat reported the Eurozone jobless rate rose to 9.6% in August from 9.5% in the previous month. The upturn came as no surprise: we’ve forecast a sequential rise in joblessness across the region as the part-time jobs that buoyed employment over the last months for numerous countries expire into year-end. This rollover occurs as employers, who under government pressure and inducements, opted for part-time contracts rather than outright layoffs face the choice of calling workers back full-time or not. As we move out in duration we’d expect the total rate to tack on at least another 100 bps as we enter the new year, with significant national divergence.  


Certainly a rise in unemployment should grind into economic performance, however we’ve yet to see this make an impact across all fundamental measures.  Importantly, forward-looking European confidence rose in September to 82.8 (the highest level in 12 months) and the manufacturing Purchase Managers’ Index rose in the Eurozone to 49.3, with manufacturing improving for the three largest economies sequentially:  German and Italian manufacturing improved to 49.6 and 47.6 but held below the 50 level signaling contraction, while the index for French manufacturing shot up to 53.0 from 50.8 in August, holding its level in expansionary territory.


Importantly consumer spending should deteriorate alongside sentiment as unemployment rises.  Although a lagging indicator, retail sales released this week for Germany fell 1.5% in August sequentially, an inflection point from July’s +0.7% reading. Further, Eurozone retail sales as measured by Reuter’s PMI held below the 50 level in August, with sequential improvement for France and Italy and a decline in Germany to 47.9.  


Eurozone inflation has also been a main focal point for us. September’s initial CPI reading of -0.3% year-over-year released this week was surprising directionally (if confirmed); we expected an incremental rise off of the August -0.2% number, as energy prices on an annual compare move the dial into (mild) inflationary territory. While we may need to push forward our timing slightly, the data suggests that food prices also drove the number deflationary.  This of course is a net benefit for consumers, who’ve also realized purchasing power with a strong Euro versus the USD.


Returning to our thesis that all European economies were “not created equal”, inflation is running a variant levels across countries. Spain measured -1% in September Y/Y, [from -0.8% in August Y/Y] while Italy recorded +0.3% in Sept. Y/Y. We continue to hold that German inflation should be flat to moderately positive over the next two quarters [from an initial reading of -0.3% in September Y/Y], a set-up we like as the economy returns to growth.  


The take-away here is that countries that were levered up into last year’s crash (like Spain or Ireland) should see deeper deflationary numbers (Irish CPI at -2.4% in August Y/Y), which should extend recovery on the TAIL (3 years of less) and put the ECB in a precarious position when it considers raising rates. 


All of this has led us to become incrementally more bearish on Europe’s advanced economies, many of which are faced with rising government budget deficits that will force them (in some cases) to cut public spending and raise taxes, placing additional downward pressure on economic performance on the TAIL. The IMF today issued its updated projections on global growth and forecasts the Eurozone to grow a paltry +0.3% in 2010, while Central and Eastern Europe should grow 1.8% and Russia 1.5% next year. The release suggests commodity producing countries and the emerging economies should drive global growth, with Brazil and Mexico forecast to expand 3.5%; the Emerging market and developing economies 5.1%; China 9.0%; and Developing Asia 7.3%. 


We’re currently long Germany via EWG in our model portfolio.


Matthew Hedrick


Bear Cubs - a1


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