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“Never ascribe to malice that which can adequately be explained by incompetence.”

-Napoleon Bonaparte

Whether it was watching Alan Greenspan and Hank Paulson on Meet The Press this weekend, or seeing Timmy Geithner interviewed from the G-7 meetings on ABC, I couldn’t help but laugh. At this stage of the game, these guys are actually quite funny to watch.

Paulson is basically on a book selling tour trying to remedy the reality of the reputation that history is assigning him. Whereas Greenspan is just losing it, and Geithner never really got it to begin with.

Maybe in another era we couldn’t analyze these men as effectively. However, today we have YouTube - and that just makes holding these guys accountable much easier. I don’t think there is any malice in their intentions. They should stop getting so defensive when we suggest that they aren’t patriots. They are simply incompetent when it comes to proactively predicting risks and recoveries.

When asked about the risk of the United States of America losing her triple-A credit rating, Geithner said “that will never happen to this country.” Conversely, the senior credit officer at Moody’s, Steven Hess, said: “If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure.”

Now I am not suggesting that Moody’s or the US Treasury is competent in analyzing risks before they become readily apparent. However, I’d argue that the Moody’s comment was more reasonable. In an America whose officialdom of research is a contra-indicator, everything is relative I suppose…

When discussing risks, didn’t anyone at the school of hard knocks teach Timmy to never say “never”? Ah, right – the poor Squirrel Hunter has never had a job in the real world. I almost forgot. Timmy, as a reminder, Greece’s deficit is 12.7% of GDP, and America’s is quickly approaching 12%.

Greenspan’s embarrassing forecasting track record speaks for itself. When asked for a forecast Paulson generally either pleads the fifth, reminds us that he was a banker, or looks to Greenspan for some confirmation bias. On Meet The Press yesterday, when they were being asked about where unemployment goes from here, all I could think to myself was that I hope the Chinese aren’t watching this.

Everyone and their brother in Washington DC will be worried about the unemployment rate in this country until their fears are entrenched in the rear-view mirror that history always presents. The reality is that Friday’s unemployment report was better than feared, but that doesn’t make it a bullish event for the stock market. Everything has a price.

Greenspan Groupthink argued on Sunday that “it’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”

This is precisely the kind of group-think that has made the US economy a boom and bust economy since Greenspan and Bernanke took over at the US Federal Reserve. The US stock market is not the only metric for a country’s long term health!

I know it’s somewhat unnatural for the manic media on CNBC to understand this concept; but better than feared economic news can be bad for stocks. Yes, the US stock market is one very important real-time metric for risk managers to absorb into their research process, but it’s certainly not the only one.

Last year we were bullish on anything priced in what we labeled the Burning Buck. For the start of 2010, we have been calling for a Buck Breakout. Now, everything priced in bucks is under pressure because the buck is smarter than Bernanke. The buck is baking in a change in Bernanke’s currently conflicted monetary policy. He needs to raise rates.

Hank Paulson wants everyone to fear the unknown. If I have to hear this guy tell me about “the alternative” to his endowing our great country with his emotionally charged state of 2008 one more time, I guess I am going to just have to keep calling him out on it. The alternative to Paulson and Greenspan Groupthink is exactly what this country needs.

The most obvious unknown today is how the US Federal Reserve signs off on an “emergency level of zero percent” returns for all Americans with a savings account with GDP running up +5.7% year-over-year, CPI (Consumer Inflation) up +2.7% year-over-year, and the unemployment rate rolling over.

Don’t ask an incompetent forecaster for the answer on where unemployment goes from here. They might actually get Washington to keep acting on their reactive opinion.

I was short the SP500 for most of last week, but covered my short position then went long it with the SP500 close to its intraday lows on Friday. I’ll be keeping a trade a trade on the long side of the US stock market as long as we have this circus act leading us down the next path to who knows where.

My immediate term support and resistance lines for the SP500 are now 1058 and 1085, respectively.

Best of luck out there today,

KM


LONG ETFS

 

SPY – SPDR S&P 500 — We bought the S&P 500 for the immediate term TRADE on 2/5/10; the long term TAIL of support continues to be bullish.

 

FXA – CurrencyShares Australia Dollar — Aussi Dollar bulls finally capitulated on the sell side on 2/4/10. We bought FXA as a long term TAIL idea that remains intact, at a price. Glenn Stevens remains our favorite central banker, globally.

 

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 — We added to our position in Germany on 2/4/10 on 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 — The long term TAIL of support for Brazil's Bovespa remains intact. We added to our position and bought EWZ on 2/4/10 on a -6.1% drop in the ETF, because the math is telling us to.

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

 

EWW – iShares Mexico We do not want to be net long Latin America (Brazil) anymore. Mexico short is a solid compliment to our short position on oil and our concerns about sovereign debt risks.

 

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. 

 

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.

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.