Learning Fast

“The ability to learn faster than your competitors may be only sustainable competitive advantage.”
-Arie de Geus

De Geus was a global macro man, of sorts. Born in Holland, he worked for Royal Dutch/Shell for his entire career (1) and was head of Shell Oil’s Strategic Planning Group. “The ability to learn faster than your competition” is a great way to think about what a global risk manager is tasked with every day.

Last week, I learned a lot about what one of our Top 3 Macro Themes for Q1 of 2010, Rate Run-up, might mean for global market risk. While my short US Treasuries (IEF), long US Dollar (UUP), position had another solid week, I ended up being way too light on my US Equity exposure.

Currently, I have only a 3% position in our Asset Allocation Model to US Equities. In a week where the SP500 was up +3.2%, and I was short the SPY (SP500 ETF) for -1.25% of that move, that made me wrong in that position.

While I was never in the camp that a Buck Breakout or a Rate Run-up were going to make the stock market crash, I was most definitely getting out of the way of what I thought would remain a credible, short term, marked-to-market fear. For now, the US stock market’s fears about the Fed raising the Discount Rate have proven to be fleeting.

The US Treasury market continues to see this differently - government bonds continue to sell off this morning. With 2-year yields trading up at 0.91%, the short end of the curve is breaking out from an intermediate term TREND perspective. Meanwhile, the long end of the yield curve continues to make a series of higher-lows and higher-highs. Intermediate term TREND line support for 10-year yields is down at 3.59%, so this morning’s yield of 3.79% is comfortably higher than that.

At +288 basis points wide, the spread between 10 and 2-year yields is within 2 basis points of its widest spread ever this morning. Ever, as we macro people like to say, is a very long time. Yes, even longer than 50 years, which is what Team USA ended last night with their respectable Olympic win against my homeland on the ice.

Our Hedgeyes affectionately refer to this 10’s to 2’s spread as the Piggy Banker Spread. That spread is the best way to measure the US Government’s choice to capitalize the profits of bankers rather than incomes for Americans with US Savings accounts. How long Washington can politicize and compromise the rate of return on your hard earned nest egg is up to the politicians, I guess. It may be sad, but it’s great for those preferred borrowers while they can get it.

This is obviously great for bankers looking to finance large M&A transactions with debt. Great, that is, until it isn’t. The ghost of the 2007 levered-loan market is back, and it will be interesting to watch corporate junk spreads trade in the coming weeks as volumes come back to the marketplace.

We’ve already seen 16 corporate bond deals and 15 IPOs pulled in the last month as interest rates have backed up. So the piggies who have been eating at the trough of a government sponsored spread are at least wavering. That said, if Bernanke panders in Washington this week (he testifies in front of Congress), there is no telling how hog wild the reflation trade can go again.

In the meantime, you don’t have to learn fast to understand this: $80/oil and $3.34/copper prices this morning are inflationary. Year-over-year US inflation growth is currently running up +3-5%, not including last week’s commodity price spike (CRB Commodities Index was +3.7% week-over-week).

Markets look forward, and maybe that’s exactly what the US stock market did after taking a good hard and long look at the SP500 futures trading down 10 handles on Thursday night. Maybe, just maybe, Mr. Macro Market is getting quite good at proactively predicting a Fed that panders to Japanese style political winds.

Markets don’t lie; people do. And I for one am not going to wake-up on this Monday morning pretending I don’t need to take up my long position in both individual US stocks and my US Equity asset allocation; particularly if we go back to a daily macro grind of politicians pretending there is no inflation in America. There remains a Bubble in US Politics that we have to manage risk around.

My intermediate term TREND line of resistance for the SP500 was eclipsed to the upside late last week. At 1099, now that’s a very important line of support. I have immediate term TRADE resistance up at 1119. Keep learning fast and manage the risks embedded in this improving stock market range.

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).

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

EWU – iShares United KingdomThe TREND of higher y/y inflation and stagnant growth = stagflation. For a country with the UK's balance sheet and leadership problems, that’s not good.

 

SPY – SPDR S&P 500We re-shorted the SP500 at an attractive re-entry point on 2/16/10. We are bearish on US Equities for the immediate term from this price. Shorting green.

XLE – SPDR EnergyWe remain bearish on Oil for the intermediate term TREND and bullish on the US Dollar on the same duration. Everything has a time and a price.

 

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.

 

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 StaplesThe 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 JapanWe 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.