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“To go beyond is as wrong as to fall short.”
We were in San Francisco, California meeting with investors yesterday. There wasn’t a cloud in the sky. There weren’t many raging bears. There were a lot of Half-Baked Bulls.
What is a Half-Baked Bull? Well, legendary California storyteller, Wilson Mizner, said that “most hard-boiled people are half-baked,” and if I spend enough time in the California sun, my Scottish turned Irish/Canadian forehead is too.
Rather than joining the ranks of some of the illustriously qualitative Wall Street strategists this morning, I guess it’s a lot easier to quantify where the buy-side really flushes out on this.
In the latest Institutional Investor Bullish/Bearish survey, we saw one of the lowest readings of Bears since the stock market crashed. And get this: AFTER the market rallies +64% from her March low (more than it EVER has over a 9 month period in modern history) only 17.6% of pros will now admit that they are bearish. Can someone pay me 2 and 20 for that?
Notwithstanding that the Bearish side of this survey routinely ran double and triple this current level of depressed Bearish sentiment in the last year, what is also fascinating to note is that 51% of institutional investors will now admit that they are bullish. Basically, we have gone from institutional money not being allowed to be bullish to not being allowed to be bearish. This is getting good!
With all of the Bernanke and Roubini fear-mongering this year, it’s been very difficult for Groupthink Inc. to get bullish and capitalize on the most hated rally of the decade. It’s been very infrequent to see a reading of Bulls greater than 50% in 2009. In fact, the last time we saw the weekly sentiment reading touch the 51% level for the Bulls was in the last week of September. The spread between Bulls and Bears is currently at its most bullish level of 2009. Again, at the top!
So, macro math fans – drum-roll – looking at the monthly returns for the SP500 and corresponding sentiment levels in the Institutional Investor Sentiment Survey, here’s how Wall Street consensus-climbing really works:
1.      September 2009 = SP500 up +3.6% (bullish sentiment peaks at 51% in the last week of September as Bears drop to 24%)

2.      October 2009 = SP500 down -2.0% (bullish sentiment drops to 47% mid-month as Bears climb to 26%)

3.      November 2009 = SP500 up +5.7% (bullish sentiment peaks again at 51% last week, AT THE YTD HIGH, and Bears hit new lows)

So, if all you did was manage risk on this one simple sentiment factor, would you be levered up long for December or positioned for another October like correction? If you ask a 2008 Bull turned Bear, turned 2009 Bull, I can assure you that their answer will be half-baked.
How is this headline for half-baked?, “Stocks Rise Around World on Dubai, China; Dollar, Yen Decline”…
That’s the #1 headline on Bloomberg this morning. So, let’s dig into it.
1.      Stocks Rise Around The World – after falling for most of last week, this is true; most equity markets are rallying to lower-highs on low volumes

2.      Dubai said that they are in “constructive talks” – this is true, but what did you expect Dubai World to call their talks? Dubai’s Credit Default Swaps have only improved by 53 basis points on this “news”; stock markets in the UAE (down another -5.6%) and Qatar (down -8.3%) are still getting hammered.

3.      China – they reported another solid PMI number at 55.2, and yes that’s an 18 month-high, but so was last month’s report. I am long China via the CAF, but will not be willfully blind to the fact that sequential (monthly) gains in Chinese growth may be stalling here.

4.      Dollar – getting crushed and now Timmy Geithner gets to make up more stories that a currency hitting new YTD lows is a bullish signal for the US Economy and his job performance; I have said it before, and I’ll say it again, a breakdown of the US Dollar into the $72-74 range is no longer bullish for REFLATION – this is the Danger Zone.

5.      Yen Decline – after hitting a 14-year high last week (yes, that’s high), prices do have every opportunity to fall; we shorted the Yen on its highs last week via the FXY, but this is just for a TRADE. The New Reality is that Geithner has no idea what the unintended consequences are of a crashing Dollar. They are global. They bubble up prices like that of the Yen. Then cost of exports and debt on one of the most levered islands man has ever created becomes a ticking time bomb.

Back to California. Another very consistent response I get in meetings with investors is that if He Who Sees No Bubbles (Bernanke) raises rates, the US stock market is going to hell in a hand basket. I disagree.
Yes, we will see an overdue correction. Yes, we will see the Half-Baked Bulls rollover again. Yes, when you cut to ZERO, the only way to move next is UP.
The Australians get this. Glenn Stevens at the Reserve Bank of Australia raised rates for the 3rd time in 3 months last night. He now has the Aussi’s sending the Chinese a base lending rate of return of 3.75%. Oh, and by the way, Australian stocks went up again on the news, taking their YTD stock market gains to +27% - outperforming the FTSE, Nikkei, and SP500 handily.
If China’s growth slows sequentially in Q1 of 2010, Stevens (unlike Bernanke) is actually positioned to CUT rates. There is nothing Half-Baked about that. This is called proactive, rather than reactive, risk management.
Remember, when it comes to keeping rates unreasonably low for an unsustainable amount of time, “to go beyond is as wrong as to fall short.” It’s time for He Who Sees No Bubbles to pull up a price chart of gold, the Yen, or short term US Treasuries this morning and wake up.
My immediate term support and resistance lines for the SP500 are now 1081 and 1110, respectively.
Best of luck out there today,

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.

XLK – SPDR Technology We bought back our position in Tech on 11/20. Rebecca Runkle has an innovation story in Mobility and Team Macro has an M&A story in our Q4 Theme, the “Banker Bonanza”. We’re bullish on XLK on TREND (3 Months or more).

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20.

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.


FXY – CurrencyShares Japanese Yen We took the opportunity to short a 14-year high in the Japanese Yen on 11/27.  The BOJ will definitely be intervening if the unintended consequences of a Geithner Buck Burning persists.

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.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

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.

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.