Going After Gold

“You wanna settle old scores, you're on the wrong team. We move forward starting right now.”
-Herb Brooks (Miracle)
 
Tonight, in Saskatoon, Saskatchewan, Canada will face-off against a young American team in the gold medal game of the World Junior Hockey Championship. The Canadians will have the edge with the home crowd behind them, but we men and women of the ice never, ever, underestimate the US National Team’s potential for a Miracle On Ice.
 
For Americans and Canadians investors alike, going for gold in 2010 is as consensus as consensus gets. Thankfully, I have been a gold bull since 2003. That score means nothing to me this morning. It’s a new season, with a new score. On this research bench, if “you want to settle old scores, you are on the wrong team.”
 
Today, we move forward. We have moved to a zero percent position in our Asset Allocation Model in Gold. Are we early? Maybe. I have immediate term TRADE resistance for the price of gold at $1137 – but I sold into the biggest up day gold has had since November 3rd (+2.3%), and I like being early.
 
I wrote an intraday note to our Macro Subscribers on December 2nd titled “Bubbly Gold: Selling Some, Again!” – that wasn’t early. That was, as they say on the ponds of Thunder Bay, “ticklin’ the twine”…
 
The top right corner of the twine, net, or chart, is the same thing. For the foreseeable future, you cannot get the puck, or the gold price, stuffed any higher than that. A decade high for the price of gold was established on December 2nd of 2009. Mark that date down. You might not see a higher-high for gold until the Fed stops raising interest rates.
 
Raising rates? Huh? Knuckle head hockey boy – Goldman says the Fed is on hold until their 2012 banker bonus season. We’re long of gold and levering up returns for some free moneys, eh.
 
That, hockey fans, would be the consensus view for 2010. Actually, throw “Long China” onto that bucket of consensus ice too (after an +80% run in 2009, Goldman is also saying buy China right here this morning as well). Sorry to keep score guys – but there’s a new chirper in this league. Game on.
 
My research team remains outside of consensus on all 3 of our core Macro Themes for Q1 of 2010. As a refresher, here they are:
 
1.      Buck Breakout

2.      Rate Run-up

3.      Chinese Ox In A Box

 
We authored the “Breaking” and “Burning” The Buck thesis early last year, so we think we have some credibility in calling the turn on our own bearish US Dollar thesis. We aren’t making this call for the sake of being contrarian. We are making it because we think we have an increasing probability of being right.
 
We put our bucks where our mouths were yesterday and bought the UUP (Dollar ETF) in our Virtual Portfolio. We also sold our position in Gold (GLD). Both of these moves are born out of the same investment thesis. He Who Sees No Bubbles (Bernanke) is way behind the yield curve. Consensus that he will remain asleep at the switch for another full year of Obama getting blamed for funding banker bonuses is politically reckless, at best.
 
Politically reckless? Pardon? What do intermediate term breakouts in both US Dollars and Treasury yields have to do with politics? Answer: Everything.
 
As Herb Brooks would say, “Again!” … “Again!”. Forget the new normal folks, we came up with The New Reality before that low growth, low rates, thesis started getting parroted by the CNBC plebes. “Again!”, The New Reality is that US monetary policy is as politicized as it has ever been. Ever, by our math, is a very long time.
 
Last week, saw the Piggy Banker Spread (yield spread between 10 and 2-year interest rates) hit its widest margin EVER. At the same time, you saw the US stock market hitting its highest of highs for the year. And, at the same time, you saw President Obama’s approval ratings hit some of the lowest levels ever in an environment of expeditiously rising stock prices.
 
You don’t need a puck to the melon to wake-up to the political conclusion that the President of the United States needs a big political win here in 2010. It’s not coming from Healthcare or Afghanistan either. Ask Hillary and Bill about that. The turn-coats are moving in on the Obama Hammer. This top political draft pick of 2009 needs to put one in the back of the net, and soon.
 
We think that political win comes against the bankers. We think the best way to ensure that populist win is to raise the rates of return on American savings accounts.
 
Forget “extended and exceptional.” ZERO rate of return being issued to the US citizenry is unreasonable and unsustainable. As soon as Ben Bernanke gets re-confirmed as Fed Head by the Senate, look for Obama to be having a little fire-side chat with He Who Has Great Depression about the same.
 
Our job is to wake-up every morning and manage risk, not to make friends. Sell your gold. Buy some dollars. “We move forward starting right now.”
 
My immediate term support and resistance levels for the SP500 are now 1123 and 1135, respectively.
 
Best of luck out there today,
KM

LONG ETFS
 
UUP – PowerShares US Dollar Index Fund
We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

XLV – SPDR HealthcareBuying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

VXX - iPath S&P500 VolatilityFor a TRADE we bought some protection at the market's YTD highs by buying volatility on 12/14/09.

EWG - iShares GermanyBuying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

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

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

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.

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30/09 and 12/2/09.

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.