“An expert is one who knows more and more about less and less.”
-Nicholas Murray
He Who Sees No Bubbles (Bernanke) had a fascinating performance in Washington yesterday. He, once again, claimed to see no bubbles. He talked a lot about the Fed’s “expertise.” He remains one of the most politicized Chiefs that the US Federal Reserve has ever had at its helm.
Rather than take his and Timmy Geithner’s word for it, we have decided to use our own expert, Mr. Macro Market, to help us proactively manage risk. What you are seeing from both the US Treasury and the Fed is called reactive management. It is a cornerstone of expertise only taught at Groupthink Inc.
Earlier this week, we called out 3 major bubbles:
1. Gold = immediate term TRADE
2. Short Term Treasuries = intermediate term TREND
3. Banker Bonuses = long term TAIL
On Gold, we posted an intraday note to our Macro subscribers on Wednesday titled, “Bubbly Gold: Selling Some, Again”, cutting our position in the Asset Allocation Model to 4% from 7%, at the YTD high. It’s ok to be long of bubbles. Just be aware when you are in one. This morning we are seeing gold correct. Our immediate term TRADE support for Gold is $1186/oz. At this stage of the game, we are a buyer on weakness and a seller of strength.
On Treasuries, our Macro subscribers saw us short SHY (1-3 year Treasury ETF) in our Virtual Portfolio when we started calling out He Who Sees No Bubbles, on November 19th. When yields hit their lowest levels EVER, we call bonds priced at those yields intermediate term bubbles. The only other times that 2-year yields have been at 0.65% (or lower) were December 2008 and December 1938. Of course, they went up from both points, and stocks went down.
On Banker Bonuses, you have to love the no shame associated with the Banker of America Sell It While You Can model. Last night’s pricing of BAC’s secondary rung the register on a $19.3B banker transaction. That was the largest secondary offering Americans have seen in almost a decade. Bubbly anyone?
The takeaway from all of this is that the experts who run this joint are experts in knowing “less and less” about what’s going on, real-time, in the marketplace. All the while, Americans are getting smarter. They are finally realizing that the perceived wisdoms of our “experts” are just that – perceptions.
Practitioners of risk management like to proactively call out bubbles before they actually pop. We call this competence.
Back to being your risk manager, here are 2 critical intermediate term TREND lines that have broke yesterday:
1. US Financials (XLF) = $14.64
2. Russell 2000 (RUT) = 590
Small caps and financials are now going down as the US Dollar goes down. So is Oil. Dollar down = stocks and commodities down? Yes, this is new. This is called unwinding the REFLATION trade.
We have been saying this, and I will say it again. At a price, the US Dollar crashing to lower-lows becomes a negative rather than a positive. That price is $74 on the US Dollar Index, or lower. Currencies in crisis create many unintended consequences that the “experts” don’t see coming until it is too late.
The price of oil has broken its immediate term TRADE line of $78.37. The intermediate term TREND line for Oil is $74.18/barrel, and now that’s in play.
My immediate term support and resistance levels for the SP500 are now 1084 (the TRADE line) and 1110, respectively.
Have a great weekend with your families and best of luck out there today,
KM
LONG ETFS
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).
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
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 -0.3%. 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 and 12/2.
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.