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“Wide acceptance of an idea is not proof of its validity.”
-Dan Brown (The Lost Symbol)

This weekend’s political and economic commentary was fascinating to observe. If you didn’t know that there is a Bubble in US Politics, now you definitely know. American politicians are more concerned with their jobs and partisan grand-standing than with addressing what is painfully missing in this country – re-establishing some accountability and trust in our leadership.
 
Domestically, we had plenty a Wall Street/Washington “economist” carted out to explain the strength of Friday’s +5.7% GDP report. Since most of them completely missed calling the US economic crash, then missed calling for the recovery, I guess it’s only fitting to have them explain why they know these numbers so well. It’s actually quite pathetic to watch.
 
Internationally, we had the soothsayers of the free money Levered Long Cycle at the World Economic Forum in Davos, Switzerland enlightening us with their latest predictions on where we are headed next. Again, I doubt many of these folks use YouTube like the new generation of Millennials, but we simpleton researchers here in New Haven, CT do. Whatever happened to the Great Depression part deux that they were all calling for in Davos last year?
 
All the while, ex-Goldman CEO, and former head of Political Groupthink at the US Treasury was on a book selling road-show titled, “On The Brink: Inside the Race to Stop the Collapse of the Global Financial System.” Apparently the man who signed off on levering up Goldman during the speculation bubble is now writing books about how he saved us from it all. Nice. Get that man another $100M, and a break on his taxes!
 
The mantra of the Bubble in US Politics has been to perpetuate a crisis so that these unaccountable fear-mongering politicians can look like they are solving it. This is not a surprise. It’s just plain sad.
 
Hank Paulson and the old boy club are feverishly trying to write their version of US history before we do. Here’s what he wrote in his book about the following architects of this financial disaster:
 
1.      Ben Bernanke – “Easily one of the most brilliant people I’ve known.”

2.      Timmy Geithner – “keen analytical mind and a great sense of calm.”

3.      Barney Frank – “scary smart, ready with a quip and usually a pleasure to work with.”

 
Unfortunately, I couldn’t make up these quotes if I tried, and they really summarize my point. This is what scares me the most about the America that my wife and I are about to welcome another child into - that Hank Paulson and Barney Frank consider themselves “scary smart.”
 
It’s scary alright. There is nothing that scares me more than Perceived Wisdom combined with political power. This country is on the brink now. We are on the brink of losing all that has made this country one of the greatest in the world. We are becoming hostage to a Bubble in US Politics.
 
Into Friday’s strong US market open, I shorted the SP500 (SPY) for the first time in a long time. Yes, the SP500’s intermediate term TREND line (1098) in my macro model is broken, but so is my appetite to carry these mounting political risks.

In an interconnected marketplace of colliding global macro factors, it’s very difficult to quantify political risk. So I just keep it simple. Mr. Macro Market votes on the impact that politicians have on market prices every day. During the week we labeled the Super Bowl of Politics, the SP500 closed down -1.6%.
 
I really couldn’t care less who Hank Paulson considers “brilliant, calm, or smart.” What I care about is managing the risk that these people are imposing on the hard earned savings of American families who need someone to stand up for them.
 
Call me a maverick or a mouthpiece. Call me Forrest Gump or Mucker. Call me Canadian or American. I really don’t care. Just don’t call me part of this colossal failure of Political Groupthink.
 
My immediate term lines of support and resistance for the SP500 are now 1056 and 1098, respectively. On Friday morning’s market strength, I raised my position in cash to 64% in our Asset Allocation Model.
 
Best of luck out there this week,
KM



LONG ETFS

XLV – SPDR Healthcare
— We bought back our bullish intermediate term view on Healthcare on 1/22/10.
 
XLK – SPDR Technology
— We bought back Tech after a healthy 2-day pullback on 1/7/10.
 
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).
 
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.

 
SHORT ETFS

XLE – SPDR Energy
The Energy ETF was up +1.7% on 1/29/10 and we remain bearish on both oil and commodity prices for the intermediate term. Shorting green.

SPY – SPDR S&P 500
The SP500 broke our intermediate term TREND line earlier this week and remains broken. The 4Q09 GDP report confirms that Bernanke has to raise interest rates. ZERO is not a perpetual policy unless the USA wants to become Japan. We shorted SPY on 1/29/10.

GLD – SPDR Gold Shares
We re-shorted Gold on a bounce on 1/25/10. We remain bullish on the US Dollar and bearish on the intermediate term TREND for the gold price as a result.

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.

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. Russia’s GDP fell 7.9% in 2009.
 
EWJ - iShares JapanWhile 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.