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“I’d rather be hated for who I am, than loved for who I am not.”
-Kurt Cobain
Kurt Cobain was the lead singer and songwriter of Nirvana. He left this world early in life. He was 27 years old. His Nirvana lives on however, having sold over 50 million albums worldwide.
Other than living vicariously through the aforementioned quote, the only thing I have in common with Cobain was my college hair-do. I am not sure if he used a blow dryer, but I definitely did. I think that’s when I first thought about risk management. Of the hockey mullet that is…
Per our friends at Wikipedia, Nirvana is a “Pali word that means blowing out – that is, blowing out the fires of greed, hatred, and delusion.” When I think about the US stock market rally of 2009, I think of the opposite of that. This may be the most hated rally ever.
Hate? Yes, newsflash: people hate this rally. They hate that they missed it. They hate who gets paid by it. They hate everything about it.
I think he was quoting Neil Young, but another Cobain line that I have taped in my notebooks is that “it’s better to burn out than fade away.” That’s definitely the way that some of the short sellers of everything Depressionista better feel right here and now. If they genuinely believed in their shorts that is. As my Resident Bear, Howard Penney, reminded us all yesterday – timing your shorts was everything.
The YTD closing high for the SP500 is barely a week old. If you hate everything about this rally, you probably hate that you didn’t short the top too. Tops are processes, not points. So far, the SP500 has corrected -3.1% from its YTD high, and is +57.2% from its low.
In the intermediate term, I think that a strengthened US currency will be bullish. In the immediate term, it’s going to get your REFLATION longs more hammered than Cobain might be after a big show. Some of the ideologues like Larry Kudlow hate considering duration versus market price. Why? Because they want “King Dollar” back, but they perpetually want the stock market going up too. Sorry guys – that’s not the way the math works.
For the week to date, the US Dollar is up +1.1%. For the week to date, the SP500 is down -1.5%. Dollar up = stocks down, Larry. That’s the immediate term TRADE. Don’t hate me for it. Don’t love me for who I, or this dominant macro inverse correlation, are not.
I can give you as long a list as anyone as to why the Buck will continue to Burn from an intermediate term TREND and long term TAIL perspective. Those resistance levels for the US Dollar Index are now $77.79 (TREND) and $82.16 (TAIL), respectively. On those two durations, the Dollar remains broken.
However, in the immediate term, I can add to some of Penney’s thoughts on why we might have a Bombed Out Buck – this is, incidentally, one of our team’s three Q4 Macro Themes – what could put a short term bottom in the Burning Buck?
1.      Insider Trading – whether we cart these guys out in green sweater sets or orange jump suits, it is credibility bullish for the Dollar

2.      Too Big to Fail Legislation – the proposal to spread the hate to all banks with more than $10B in assets is less bad for the Fed’s Balance Sheet

3.      Rate Rotation – another one of our Q4 Macro Themes remains that the Fed has to move to where marked-to-market prices have, and raise rates

The biggest problem with these 3 points is the one some of the perma-bulls hate - duration. Remember, a lot of these people who have never seen a bull market that they didn’t like will tell you that they “can’t time markets” and that they “invest for the long run.” People whose money they lost hate that narrative fallacy too.
Hate is not cool, but the American public hates everything about this rally too. “Can’t time markets” means people don’t have a real-time process to manage risk. “Invest for the long run” gets the asset manager paid, not the client.
For most of this year, I’ve been annoying the hedgie girls with my hair blowing line of ‘Burning Buck means that the Debtors, Bankers, and Politicians get paid, and the Creditors/Consumers pay the bills.’ Don’t hate me for it – look at the recent data – America has voted:
1.       Last night’s NBC/Wall Street Journal poll has 64% of Americans saying that Dow 10,000 “doesn’t mean much”

2.       This morning’s ABC/Washington Post consumer confidence reading is at -51, down for the 3rd consecutive week

3.       Yesterday’s monthly consumer confidence reading for October came in at another lower-high, and down month to month

The New Reality isn’t that people hate the truth. It’s that Washington and Wall Street have to finally face it. Hating the US Financial System that we built is something that we have to all take a long hard look in the mirror at and think about.
For now, all I can do is tell you what I see in the US stock market. The SP500 has broken its immediate term TRADE line (1067) and the US Dollar is up again this morning, testing a breakout above its immediate term TRADE line ($76.20). For now, that’s bearish for mostly anything priced in US Dollars. For now, we need to stop hating the idea that the immediate term fix to this compromised US Financial System is going to cost us something.
This country’s Nirvana needs to find its love of American principles again. And that isn’t going to be found by empowering those who put us in this environment that we all hate to begin with.
My immediate term support/resistance lines for the SP500 now move to 1049 and 1084, respectively.
Best of luck out there today,

EWZ – iShares Brazil
President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

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.

XLU – SPDR Utilities We bought low beta Utilities on discount (down 1%) on 10/20. Bullish formation for XLU across durations.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20. The currency ETF traded down -2%, but the TRADE and TREND lines are holding up next to Daryl Jones’ recent note on the Canadian economy.

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.

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.

UUP – PowerShares US Dollar
We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.

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.