Napoleonic Heights

“My downfall raises me to infinite heights.”
-Napoleon Bonaparte
 
The history of The Emperor Napoleon losing his proverbial clothes is one of my favorites. If the British and Americans aren’t careful with their respective financial systems and currencies, they might start looking a little 19th century French, à la 1815 Waterloo, sometime soon…
 
Unlike poor Bernie Madoff (who apparently got into a prison brawl in yesterday), Napoleon spent the last 6 years of his life under British supervision on an island.  He wasn’t a fraudster, so they went easy on him, I guess…
 
But will the world’s central banks go easy on the British Pound and the Burning Buck? The answers to these questions aren’t at all clear. What countries say for political purpose seem to be quite different versus sales they are making in the market. For the last 9 months, I have been spending an inordinate amount of time bantering about Breaking it and Burning it, but that time could have equally been focused on Pounding it – Pounding the Pound that is…
 
Consider the French versus the British this morning, straight up on one economic score:
 
1.      France Consumer Prices (CPI) for September came in at -0.4% year-over-year

2.      British CPI for September came in at +1.1% year-over-year

 
In Europe, not unlike Napoleon when standing alongside other military leaders of his time, one of these things is not like the other. Their heights.
 
Alongside the Pounding of the Pound comes heightened levels of domestic inflation for British consumers. The Eurozone, on the other hand (which maintains a strong currency policy that’s actually pseudo credible), imports deflation for their citizenry,
 
I know, I know. These differentials aren’t monstrous, but neither were the competitive advantages that took down Napoleon in 1815 at Waterloo. The New Reality is this: The Chinese have a lot of money that they can invest, wherever they want, and interest rate and currency price differentials matter to them.
 
My loving Mom’s maiden name was Thiboutot. I went to French-only school until the end of the 5th grade, so please don’t send me nasty-grams about not liking the French!  However, to be clear, next to Italy, France is one of the last places in the old G7 that I would be investing capital right now.
 
When I look at the G7 countries today (Canada, France, Germany, Italy, Japan, UK, and USA), the opportunities on the French Canadian side look more palatable than on the Parisian side. Canada reported a much improved unemployment rate of 8.4% this past month (down from 8.7% prior), and looks poised to play an Aussi Rules rate game in the near future. If you show me a rate of return that is greater than ZERO, I’ll call my Chinese boys in to give you a look-see.
 
Alongside the CRB Commodities Index hitting its YTD high yesterday, so did the Canadian Loonie. As America and Britain Burns and Pounds their respective currencies into the political sands of Capitalism Lost, the world is still open for Global Currency Diversification business.
 
If you were (or are) Chinese, and tomorrow you read the following two headlines, what currency would you buy?
 
1.      Brown’s Bank of England (BOE) expands asset and bond purchase programs

2.      Shirakawa’s Bank of Japan (BOJ) withdraws corporate debt and commercial paper programs

 
This isn’t that complicated folks. This is the increasingly interconnected world financial system that you live in. There are countries like Japan that have new political leadership for the 1st time in 55 years that could actually change their longstanding and compromised monetary policy, while those countries like America and Britain take Japanese like politicization of monetary policy to Napoleonic Heights!
 
I am sure some of the smartest Wall Streeters on the planet can explain to me exactly why the Japanese Yen going up “isn’t fundamental.” At the end of the day though, the price of the Yen is at close to a 9 month high for more reasons than those that explain a portfolio managers revisionist performance problems.
 
If the Japanese say “No-Morah” to limitless lending, the New Heights for Japan’s currency are still ahead of us. Particularly if the British Pound and US Dollar move to New Lows…
 
Yesterday, that ole Buck was Burning again. Most things priced in bucks hit New Heights, as a result. While the Nasdaq had an Outside Reversal day (breaking out to new YTD highs intraday, then reversing intraday to close at a lower-high), the SP500 closed up for the 6th day in a row to a New Height of 1076.
 
I’ve been wrong in missing most of this move in US Equities for the last 6 days. I’ve been right in being long the associated protections against currency imported accelerations in inflation expectations (I’m long an 11% position in TIPs, and still have a 4% long position in Gold).
 
I’m waiting to see if the US Dollar can continue to make higher-lows. I am waiting to see if the US Federal Reserve has a spine in seeing these New Heights in marked-to-market leading indicators (oil, TIPs, gold, copper, Russian stocks, Chinese demand, JPM earnings, etc…). I’m waiting to see if this Global Asset Allocation Diversification is both America and Britain’s Currency Waterloo…
 
My immediate term support/resistance lines for the SP500 are now 1053 and 1086, respectively.
 
Best of luck out there today,
KM

 

LONG ETFS
 
EWT – iShares Taiwan
With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

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.

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.

 
SHORT ETFS
 
XHB – SPDR Homebuilders We were the bulls on a Q2 housing turn but, as the facts change so do we: now we are getting cautious on 1H 2010 US Housing. Rates up as access to capital tightens is not good for new home builders as we enter into a new year and series of potential catalysts for renewed pressure in the secondary market, including the expiration of the $8,000 tax credit.

USO – US OIL Fund WTIC Oil traded just north of our overbought line on 10/12. With the US Dollar hitting another higher-low, we shorted more of oil’s curve.

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.


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