“Fear has its use but cowardice has none.”
-Mahatma Ghandi
I sold into yesterday’s intraday US market strength again, primarily because my macro models told me to, but also because the Faith and Fear model of the old boy network in this country is really starting to worry me again. Never forget that these guys created the crisis that they claim to be saving us from.
There is absolutely no risk management process associated with having faith at the market’s highs and fear on the lows. The sad truth is that Washington has been fear-mongered into believing that a Fed hike will be the end of us all. As a result, our fine nation’s monetary policy becomes more and more like Japan’s with each passing market downtick.
When it comes to the economy, the mantra of both the Bush and Obama administrations has been to use fear as the governing principle behind keeping American savings account rates of return at zero percent. At the same time, there is some kind of backward looking faith that what happened during the most expedited 9-month stock market rally in a generation should be underwritten by a pandering Federal Reserve policy.
This isn’t just a Washington thing. This is very much a Wall Street thing. On December 29th, 2009, after the SP500 had rallied +66.7% from its Great Depressionista freak-out lows, I called out two of the most predictable perma bulls who, sadly, have influence over our manic financial media:
1. Bill Miller said “there is a lot of upside left”
2. Larry Kudlow was calling for a “mini-boom”
I titled that morning missive “Frightening Faith”, and that’s really all that was. As I have said many times in the last few years of penning my thoughts, hope is not an investment process. Neither is maintaining zero percent returns on our fixed incomes for an “extended and exceptional” period of time.
The good news is that there is one brave American soul who stood up at the last Fed meeting and agreed with me. Kansas City Federal Reserve President, Thomas Hoenig, dissented with He Who Sees No Real-Time Data (Bernanke) saying, “I dissented on the language.”
The bad news is that one independent voice isn’t yet strong enough to overcome the conflicted and compromised group-think that puppeteers this nation’s financial system. Sure, there are some fiscal conservatives who understand what a balance sheet is and respect that the cost of capital shouldn’t be zero – but at the whiff of a stock market down move, most of them run for the exits saying that “now is not the time” to tighten the Piggy Banker Spread.
The immediate and intermediate term bubbles that we said should pop (Gold, China, etc.) have already popped. The mother of all bubbles that remains isn’t where all of the lemmings are looking this morning. It’s the one that these political cowards live in – the Bubble in US Politics.
The best way to measure this bubble is via that Piggy Banker Spread and the bankers at UBS chowed down on it, big time, this morning. They reported almost $1 Billion in profits. The Spread (10-year minus 2-year yields) is +281 basis points wide. That’s only 0.005% away from its widest spread ever!
Thankfully, wealthy investors aren’t stupid. They get this. UBS may have made themselves a “B”, but the clients ran for the exits. The UBS Wealth Management division saw quarterly redemptions of $42 Billion, almost doubling from the total client money leaving the building in the quarter prior.
President Obama may be having a hard time executing on the Transparency, Accountability, and Trust model of his Presidential campaign, but Americans are obviously voting with their wallets. They have no faith in the current financial system. They fear those who are running it.
The SP500, Asian and European Equities, Commodities, and most Foreign Currencies have all recently broken both their immediate and intermediate term TRADE and TREND lines. The market doesn’t lie. It never believed in the US Dollar devaluation trade being a long term fix to begin with. From here on in, we will be held hostage by the Faith and Fear model that these politicians perpetuate.
Here are some critical intermediate term lines of resistance to consider, across asset classes, globally, as you manage the volatility and risk politicians around the world are underwriting:
1. SP500 = 1099
2. Nasdaq = 2193
3. Shanghai Composite = 3158
4. Hang Seng Index = 21,709
5. London’s FTSE = 5360
6. Germany’s DAX = 5751
7. WTIC Oil = $77.28/barrel
8. Gold = $1110/oz
9. Euro/USD = $1.46
Every morning, we have our feet on the floor very early in order to manage the risk these political cowards impose upon our children’s futures. The reason why they don’t give you any transparency on what they see coming is simply that they don’t know.
They have never known. Maybe that’s their faith. A faith in the fear of their own incompetence.
I raised my cash position to 58% in the Asset Allocation Model yesterday. I sold my SPY (SP500) position and I cut my equity position in Brazil (EWZ) in half. I maintain a zero percent asset allocation to Commodities, and my immediate term support/resistance lines for the SP500 are now 1045 and 1081, 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 — 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
XLP – SPDR Consumer Staples — The Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.
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 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.
