A Perfect Day!

10/14/09 08:08AM EDT

“When you realize how perfect everything is you will tilt your head back and laugh at the sky.”
After veteran Fed Head, Donald Kohn, pandered to the most politicized policy making stance in US economic history last night, what is there not to like about anything priced in Burning Bucks? This is perfect! Isn’t it?
The Credibility of the US Currency has been blown right out of the water, and now the Buck is Burning to lower-lows. This morning’s early trading sees the lowest price we’ve seen in 14 months for the US Dollar Index, trading down another -0.63% at $75.50. Importantly, the only prices that were lower than this for the US Dollar (since 1971 when the USD became the world’s “Reserve Currency”) was that which we saw right before the 2008 US stock market crash.
This is perfect!  Right? Go, Go, Jaime D-iego Earnings, GO!
In the immediate term, of course, it is! Never mind about the intermediate term or long term implications. Let’s jack this Dow Jones party up to 10,000 feet and start paying out them Wall Street bonuses again baby! If your neighbor says anything about it, just “tilt your head back, and laugh at the sky!”
The #1 headline on Bloomberg this morning is: “Stocks, Oil Climb on China Exports; Dollar Drops, Gold Gains.” Doesn’t this sound like a perfect environment for the Fed Heads to fear-monger you into thinking about Bernanke’s Great Depression text books? The Vice Chairman of the Fed (Kohn), who has never seen an asset price bubble that he understood, has a view that the chance of accelerating prices isn’t something we need to worry about “for awhile.”

What Almighty Incompetent One is “awhile”? Oh, right - the Fed doesn’t do specific durations. That’s perfect too! Now we can really jack this party’s volume up. Let’s ignore the accelerating prices that are marked-to-market though, and take Geithner’s Aides word for it. They are paid to be willfully blind. They’ll never know how loud we actually have this bullish Dollar debasement volume dialed up to anyway!
Perfect is as perfect does. Sounds like October of 2007… unfortunately…
For now, look at these bullish country level stock market prices accelerating which, ostensibly, the compromised and conflicted get paid to ignore.  Just “tilt your head back and laugh” some more:
1.      SP500 futures 1082 = that’s only +60% higher than said Great Depression Part Deux in March

2.      China closed up another +1.2% to +63% YTD, after reporting a sequential ramp in exports of 700 basis months month-over month!

3.      Hong Kong and Australia tacked on +1-2% moves overnight, taking both markets to higher-highs at +52% and +32% YTD, respectively

4.      Germany is leading Western European stock markets to new YTD highs, trading +1.8% so far this morning to +21% YTD

5.      Russia adds another +3.4% to its YTD deflation of +129%! Oops, I mean reflation – or Mr. Kohn is that an acceleration?

6.      Brazil’s Bovespa closed up at a fresh YTD high yesterday of +72%; accelerating prices anyone?

With that Buck Burning, don’t be bringing up the Commodity side of year-over-year price accelerations now either. That’s not going to be perfect for our newfound narrative of PERFECT! Shhhh… talk about rents or housing or something would ya…
Instead of seeing that oil moving from $35/barrel in Q4 of 2008 to $75/barrel this morning, or that the price of Gold or, God forbid, TIPS (Treasury Inflation Protected Securities), let’s let this Buck Burn at the stake. This is perfect for Debtors, Bankers, and Politicians. Never mind the citizenry… they don’t really watch this American Financial Wizard of Oz show on YouTube do they?
Yes, fortunately, they do. In face of the US stock market making higher-highs and the US Dollar making lower-lows, this week’s reading on American Consumer Confidence (ABC/Washington Post weekly data) dropped a full 3 points to minus -48 (down from -45). Maybe not so perfect for everyone after all…
Of course this isn’t perfect for everyone. In the long run, our long standing position as the world’s financial reserve fiduciary will be dead. In the meantime, them Intel and JP Morgan earnings really look perfect though don’t they! Give me a big CNBC Booooyah!
I have a higher-high of immediate term TRADE resistance now for the SP500 at 1090. Immediate term support remains at 1053. Our Macro Team will be holding our Q4 Research Edge Macro Themes conference call this afternoon. If you’d like information about the call, please email .
Best of luck out there on this perfect day for America!

XLU – SPDR Utilities
We bought low beta Utilities with a reasonable dividend yield on 10/13.

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.

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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