Volcker's Soul

“I may not be alive to see the crisis, but my soul will come back to haunt you.”
-Paul Volcker (February 2nd, 2010)
 
Hearing Paul Volcker speak his mind is always both a pleasure and a privilege. The man didn’t win any Washington Groupthink points while testifying to the Senate Banking Committee yesterday, but who really cares?
 
As the old battle axe of the American Financial System’s credibility-lost was attempting to beat some very basic points about how the conflicted and compromised business model of a “full service” investment bank works into the melons of paid off politicians, the US stock market rose like a phoenix.
 
At one point, Volcker told one financially illiterate politician, “my soul will come back to haunt you”, and the Bubble Boy who missed proactively preparing  for the recent financial crisis actually snickered. At the same time I was being pinged by a few market players that “this Volker Rule is dead.”
 
Well folks, as our American patriot admitted yesterday, he may very well be dead by the time these reactive short term Washington decisions come home to roost. But as sure as you are waking up to a nice two-day pop in your 401k this morning, Bank of America is paying their bankers $4.4 Billion in bonuses. If you don’t know those bonuses were partly financed by a government sponsored Piggy Banker Spread – now you know.
 
The Stickler (Bank of America’s spokesperson, Robert Stickler) is seemingly empathizing with the 11% of Americans who are now on the USDA Food Stamp Program (up from 6% when Bernanke took over from Greenspan) saying this morning that, “we attempted to balance the need to pay competitively with our understanding of the general concern.”
 
Nice Stickler. Nice.
 
Again, for those incompetent political lemmings who don’t get the trade. Bernanke’s academic background (Great Depressionista) is being used as a political backboard to fear-monger this country into buying that we need an “emergency level of zero percent” interest rates on our hard earned savings accounts for an “extended and exceptional” period of time…
 
Then, the government supported bankers borrow moneys on the short end of the curve at zero percent, plug the citizenry with a higher lending rate, and keep the spread between what American citizens would have ordinarily kept as fixed income in their savings accounts.
 
Americans aren’t stupid, but most of the elected politicians using their short term job security duration to judge Paul Volcker’s long term wisdom must be. This morning’s ABC/Washington Post weekly consumer confidence reading dropped from minus -48 to minus -49. Nice Stickler. Nice!
 
Since no one running this country really gets paid to proactively prepare our children for the long term, let’s just go back to our immediate to intermediate term market views. Pavlov, if you are still out there, at 930AM, will you please ring the bells?
 
As the fleeting momentum of the “Volcker Rule” faded, so did the price momentum that was being built behind the buck’s credibility. After having a bang up week of +1.7% last week, the US Dollar is down for three straight days this week, and I am feeling the immediate term TRADE shame. Both Gold and the SP500 were up yesterday. I am short both.
 
I remain bullish on a continued Buck Breakout here in Q1 of 2010. A three-day -0.8% correction from the 5-month high the US Dollar reached on Friday certainly has my attention. So does a +3.4% bounce in the gold price. For now, irrespective of Volcker being put back in the closet, I am maintaining my intermediate term (3-month) view and the positions implied therein. The Fed needs to raise rates.
 
On US Dollar weakness yesterday, I upped my position in the US Dollar (UUP) to a 12% position in our Asset Allocation Model. Having had sold some into Friday’s strength, this is what I do. It doesn’t always work, but the idea is to buy on red and sell on green, actively managing exposures to my core positions.
 
On Friday, I titled my Early Look, “Red Light Risk”, and shorted the SP500 (SPY) when it was up a full percent on the rally associated with the Q4 GDP report. That made me look smart for a day, and not so smart yesterday.
 
I also highlighted the risk associated with what we call Duration Mismatch, using David Einhorn’s long position in gold as an practical example of a difference in opinion on duration. David kindly sent me a note in reply on Saturday morning, and it turns out the only thing we really disagree on is timing.
 
Einhorn wrote, “We are bullish on the dollar vs. the yen, euro, & pound. We like the dollar more than most everything but gold at the moment. Or maybe we just hate it less than the other currencies. We are long various European sovereign CDS.” My name is Keith McCullough, and I support that message.
 
I’ll post David’s full rebuttal on our Macro portal sometime today. It was one of the most even-handed and intellectually objective replies I think I have ever had since I started this firm.
 
If only America’s political leadership had the economic and financial understandings of the real players who wake up to play this game every day like David Einhorn does. Maybe one of the most thoughtful leaders of an American generation of finance wouldn’t have to threaten some crackberry politician with his soul…
 
My immediate term support and resistance lines for the SP500 are now 1071 and 1116, respectively.
 
Best of luck out there today,
KM

LONG ETFS

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

USO – United States Oil
FundWe have been waiting, patiently, to short the US Oil Fund on an up day, which we got on 2/2/10. We are bullish on the Buck and bearish on China right now. These factors contribute to our multi-factor (bearish) intermediate term stance on the oil price.

EWJ – iShares Japan
We shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.

UNG – United States Natural Gas
Fund Macro DJ (Daryl Jones) and I remain bearish on Commodities. Natural Gas had a healthy price pop on 2/1/10, prompting us to short it.  

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 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.