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“Learn all you can from the mistakes of others.  You won't have time to make them all yourself.”  
-Alfred Sheinwold
“Freddy” Sheinwold was born in London, emigrated to the US, and became one of America’s most famous bridge players. He was also a writer and, at one point during World War II, the Chief Code and Cipher Expert for the US Government.
Freddy learned that there is a lot to learn in terms of the ‘what not to do’s’ in both games and war. I have a great deal of respect for this approach to investing. That’s really what managing risk from a global macro perspective is all about.
Take, for instance, what’s happened to consensus expectations on Chinese growth and stock market returns in the last 24 hours. This is how Bloomberg news summarized why Chinese stocks got hammered overnight: “an unexpected shift by China’s central bank to restrain lending may foreshadow higher interest rates and a relaxation in the nation’s currency peg against the dollar.”
Obviously, those of you who have been going through your global macro paces for the last 6 weeks know that these proactive moves by the Chinese government are not “unexpected” at all. All you needed to have was a repeatable (daily) global macro process and you would have already positioned yourself for this. China explicitly told us they were going to tighten the screws on speculative investment. Making that call wasn’t rocket science.
Rocket science is what some investors consider their super special views on bottoms up investing. Sorry to break it to you Captain stock picker, but figuring out that a company is cheap with pending positive investment catalysts is something that all great investors should be able to do. If it was a God given talent set aside for a select few, why do we have so many money managers in this world purporting it to be their secret sauce?
I believe that you need to wake-up every morning with an all-star bottoms up investing process and a disciplined, but malleable, top down global macro risk management process to augment it.
Having been a “I know everything about this company” hedge fund Jedi of doing one-on-ones (I did over 256 of them in 2004) with corporate management teams, I have the perspective to tell you this because I have made plenty of mistakes. At least two-thirds of my company specific investment blowups have been due to missing Mr. Macro Market moves. That’s why I wake-up early every morning trying to stay one step ahead of the macro oriented mistakes of others.
China closed down -3.1% last night, taking the Shanghai Composite below its immediate term TRADE line of 3220. The Chinese have raised rates twice in the last 2 weeks and have now explicitly tightened the reserve requirements on their domestic backs to much higher levels than what you currently see here in the US banking system. China wants “quality” growth, not speculative levered-up growth.
On the heels of the unprepared reacting to the “unexpected”, the Hang Seng Index in Hong Kong broke its critical intermediate term TREND line of 21,829, closing down -2.6% on accelerating daily trading volume. Korea, Japan, and Indonesia saw their stock markets down in reaction to the wall of China worry, trading down -1.6%, -1.3%, and -1%, respectively.
The New Reality remains. Mr. Macro Market waits for no one. Global markets are increasingly interconnected and demand that money managers learn from the mistakes implied by consensus not having a global risk management process.
Another major global macro risk that continues to weigh on my mind is sovereign debt. I touched on this yesterday, so here’s the update. Indonesia tried to plug the market with $4B in debt yesterday, and the demand was only there to get half of that done. So the government issued $2B in 10-year sovereign notes at 6%. That’s +225 basis points higher than what He Who Sees No Inflation (Bernanke) is willing to issue prospective US Treasury investors on the same duration.
What a deal right? Since the beginning of 2010 we have now seen the Philippines, Mexico, Poland, Turkey, and Indonesia issue $10.86B in debt. To put that in context, that’s the highest level of debt issuance for emerging markets since the Tech bubble days of 1999. Again, I don’t think we have massive equity market bubbles in the world like we did in 2007, but we definitely have a Debtor Nation bubble.
As our mentor Herb Brooks beats into our thick hockey skulls, Again! Learn from other people’s mistakes. Nations piling debt upon sovereign debt is not new folks. Neither is Moody’s giving a country like Japan an absurd debt rating of Aa2 (their 3rd highest rating, whatever that is) when the they have pushed their debt balance over 200% of GDP. Players and pundits alike are constantly making macro mistakes in this game. Use that consensus backboard to your advantage.
My immediate term support and resistance lines for the SP500 are now 1118 and 1153, respectively. We were a buyer on weakness in US equities yesterday. We covered our short position in gold (GLD) on the biggest down day it’s had in 3 weeks. We remain out of China (and all emerging markets other than Brazil), for now.
Best of luck out there today,

XLK – SPDR Technology
Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.

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 Healthcare
Buying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

VXX - iPath S&P500 Volatility The VIX broke down to our immediate term oversold line on 1/6/10, prompting us to add to our position on VXX.

EWG - iShares Germany Buying 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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



IEF – iShares 7-10 Year Treasury
One of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

FXE – CurrencyShares EuroWe shorted the Euro ETF on strength on 1/11/10. From an intermediate term TREND perspective we remains bullish on the US Dollar Index.

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.

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.