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“He is mad past recovery, but yet he has lucid intervals.”

-Miguel de Cervantes

Cervantes was one of the most famous novelists of the 16th century and he is often recognized as having tremendous impact on the Spanish language. He authored Don Quixote, the story of a man who, per our friends at Wikipedia, carried “his enthusiasm and self deception to unintentional and comic ends.” How appropriate a description for what we are watching unfold across global markets today.

In classic contrarian form, European stocks have been recovering their oversold losses for 6 out of the last trading 7 days. This short-term lift is largely a reflection of the manic media’s attempts to compartmentalize global macro risk reactively, rather than proactively. The timing of their fear remains the contra-indicator for global macro risk managers.

Debt laden governments are certainly “mad past recovery”, but they do have foreseeable “lucid intervals” of strength that you should capitalize on. As equally important as it was to have sold your international equity exposure into 2009’s hopeful year-end, is as important as it is to recognize that global markets don’t always crash in a straight line after they have incurred double digit losses.

Despite broad strength across Europe’s major stock market indices this morning, Greece’s Athex Index is losing another -2% of its value. Year-to-date, Greek equities are down -15.2% and they’ve crashed -35.7% since October 14th, 2009.

What does this mean? Shouldn’t all those who are pressing their Euro shorts be getting paid at the same time as they press the same bet? Doesn’t everything happen in the vacuum that our manic media and governments perpetuate? Hardly.

Greece’s deficit and debt issues are no different than America’s or Japan’s. Just because pundits are finally focused on them doesn’t make them new. These are going to be endemic issues that will not be resolved in the next 1 to 3 weeks. This madness of piling debt upon debt upon debt to solve for the economic incompetence of our politicians is chronic. Unfortunately, the long term pain will be with us for years to come.

So back to the grind of understanding opportunities in buying-low and selling-high this morning. For now, government’s are sponsoring volatility, and this is the best we can do to manage lucid intervals of the market’s hope.

Both China and Hong Kong were closed last night, but that certainly doesn’t change the fact that China is tightening monetary policy and that stocks across Asia remain broken across their intermediate term TREND lines. ‘Tis now the Year of The Tiger, but last year’s Chinese Ox remains in a Box. The 3 intermediate term TREND lines of resistance to focus your risk management on in Asian equities are as follows:

1.       China’s Shanghai Composite = 3155

2.       Hong Kong’s Hang Seng = 21,614

3.       Japan’s Nikkei = 10,466

In Europe, despite my being long Germany and the DAX trading up another +1.1% this morning, it doesn’t mean that the intermediate term TREND line is no longer broken. Stocks can rally to lower-highs and remain broken. As risk managers, we are tasked with selling into strength, not chasing it. Here are some major intermediate term TREND lines of resistance in European equities to consider:

1.       The UK’s FTSE = 5284

2.       Germany’s DAX = 5709

3.       Spain’s IBEX = 11,581

In Europe, despite most of the market’s attention being focused on Greece, Spain and Portugal again this morning, the inflation number in the UK is a critical one that will not cease to exist because it’s being ignored. For the month of January, UK consumer prices (CPI) hit a 14-month high, accelerating to +3.5% year-over-year. This inflation acceleration wasn’t in the area code of the Bank of England’s forecast, so please don’t ask them what they thought about it.

Later on this week, in the US we will get a continuation of the same. Year-over-year inflation reports in the United States will be running up +3-4%, and since the Federal Reserve doesn’t have this in its forecasts as being sustainable, please don’t ask them what they think about those numbers either.

Ask the US Dollar and the long-end of the US bond market’s yield curve what they think. Both continue to trade very bullishly, making a series of higher-highs on rallies and higher-lows on selloffs. Markets don’t lie; politicians do.

At the end of the day, despite the madness of all that has become this market circus of “enthusiasm and self-deception”, higher-cost of capital and tightening access to it will continue to manifest into a long term global affair. An addiction to debt has a long term price that needs to be paid.

My immediate term downside target for the SP500 remains 1046. I have intermediate term resistance up at the TREND line, which remains 1099. As a reminder, we’ll be hosting our Q1 Macro Theme update call at 11AM EST. Please email sales@hedgeye.com if you’d like to participate.

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.  

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

 

GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.

 

CAF – Morgan Stanley ChinaThe Chinese Ox Remains In A Box. We shorted CAF on 2/10/10 ahead of another inflationary report that registered China’s CPI at +1.5% in January Y/Y, and PPI at +4.3% Y/Y.

RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.

 

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.

EWJ – iShares Japan We re-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.

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