Octopussy

“You have a nasty habit of surviving.”
-Kamal Kahn
 
As far as we know, ex-Galleon employee, Roomy Kahn is not related to the wealthy Afghan prince from Octopussy. That said, there seems to be plenty of metaphors that apply to James Bond spy films in the latest hedge fund round of arrests. The man with the smoking Galleon gun called himself Octopussy.
 
Ok. So. We know some of these hedgies are really smart, but…
 
1.      No Man makes up his own nickname

2.      Octopussy is a woman


I couldn’t make this up if I tried. The way by which certain people in this business sought out inside information is both pathetic and sad altogether. We need these people to just strap on a Raj-green sweater vest and some cuffs and go on their merry way to the Big House. It’s time for these Goldfingers to fully admit what it is that they do, leave the US Financial System, and hand over the assets to those fiduciaries who have a legitimate investment process.
 
Whether it be Madoff, or Stanford, or now Octopussy… for the Burning Buck, it’s all the same. Not only is American Finance land locked with the most politicized monetary policy we have ever seen, the Asset Management side of the business is facing a Credibility Crisis of generational proportions. In the age of YouTube and real-time data feeds, what do you think the Chinese think when they watch these almost fictional missions of espionage and deceit?
 
As the Credibility Crisis mounts, the Buck continues to Burn. Here are the three main drivers of the US Dollar hitting 2-week lows this morning:
 
1.      Fed Balance Sheet – after dropping last week, it went straight back up this week to $2.17T (T, as in TRILLION)

2.      G20 Meetings – they’ll play a little golf in Scotland this weekend; Monday’s news-flow will be anti-US Dollar

3.      Octopussy – re-reruns of the 1983 flick will be playing on a cable channel near you this weekend; starring General Orlov Hedgie

 
As Octopussy fans will remember, the Soviet renegade (Steven Berkoff) was the bag man for Kamal Khan. Russian style geo-political power is making a comeback these days. If you didn’t know that – now you know. It’s one of those unintended consequences of our Fed Heads not getting out of Washington much. The Russians get paid in inflated petrodollars, fyi…
 
Now that Russia’s stock market is leading the majors of the world for the YTD at +115% (including another +0.44% gain this morning in early European trading), Putin Power is looking to raise some debt. This is big. Understand that the Russians haven’t issued government debt since Pierce Brosnan played Bond in “Tomorrow Never Dies”, circa 97-98’. Remember Russia’s default? The guys at LTCM do. These Russian financial instruments “have a nasty habit of surviving!”
 
Whether it be Middle Eastern “Sukuk” oriented bond deals or the American LBO train finding her rails on Burlington Northern associated deal speculation again, it’s all born out of one and the same. Government’s have a Greenspan mandate to issue moneys from the heavens. This debtor addiction has indeed gone global.
 
Octopussy (when Bond was in traction): “I wish you weren’t in such a weakened condition.”
 
As long as the self perceived heroes of our governments can release themselves from the traction associated with massive debts and passionately kiss Octopussy, what does it matter folks? This is out of our control at this point. This movie is for real.
 
For those who are telling you that the US Dollar has stabilized, please get them a movie clip of the Slow Moving Train Wreck that has become our currency chart since Nixon abandoned the Gold Standard in 1971. The US Dollar is trading down for the 4th week out of the last five. Since March, its down -16%. That’s a crash.
 
I know it’s becoming consensus, but so is Bond getting the girl. “I trust that you can handle this contraption” of a dollar DOWN = everything priced in dollars UP correlation. It won’t last forever, but for now you are still getting paid by this “From Russia, With Love.”
 
Ahead of the employment report, I have done a lot of nothing.  My immediate term support/resistance lines for the SP500 are now 1029 and 1076, respectively.
 
Have a great weekend. Best of luck out there today,
KM

LONG ETFS

 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 on 10/20. TRADE and TREND bullish.

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.   

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

 

XLI – SPDR Industrials Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery. TRADE bullish, TREND bullish.

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

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.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. There continues to be 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.

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.