“There is nothing new except what is forgotten.”
Marie-Jeanne Rose Bertin was the first fashion designer of consequence in Europe’s 18th century. Some argue that she deserves to be credited with bringing “haute couture” to our lives. Bertin’s success story is an inspiring one. She didn’t come from much. She didn’t do group-think.
As our in house fashionistas, Eric Levine and Mick Malisic, often remind me, popular culture finds its way into and out of our wardrobes. Fashion, like investing, is cyclical. The faces and the names may change, but inspirations are often born out of “what is forgotten.” This is a great metaphor for measuring the amplitudes and durations of market risk.
On Wednesday, I titled my strategy note, “Selling Fear” – and that’s exactly what the manic media delivered to you yesterday. This was proactively predictable. Selling Fear is currently very fashionable and I think that you should continue to capitalize on understanding that.
Let’s start with what’s become the most consensus fear in the Federal League – sovereign debt default in Greece. Yesterday was unique in that you saw two huge contra-indicators permeate the market’s early morning trading at the same time:
- Fears of Moody’s and S&P downgrading Greece’s debt rating
- Fears of 3 million Greeks striking in the streets
So, let’s consider the second fear first, because the groupthink associated with it is the most glaring. Anyone with a college education knows that Greece is not a large country. There are only 11.3 million people in Greece, so when you see 3 million of them on strike, it’s neither a positive event or a unique thought to consider it one. Both the Greek stock and bond markets have been discounting this national strike for weeks. Mr. Macro Market looks forward.
The first fear is what Harvard’s Ken Rogoff himself labeled the “worst early warning indicator of banking and currency crises” (for those of you who have the reference material for Sovereign Debt For Dummies on your desk, Reinhart & Roggoff have Moody’s sovereign ratings outlined in a nice table for us on page 280).
Now any real player knows that Moody’s and S&P are contra-indicators in this global macro game of risk management. What’s most frightening about this week is that the peak in fears about Greek debt defaults were, in fact, partly driven by Ken Rogoff himself! (The #1 Bloomberg headline on Tuesday morning was “Harvard’s Roggoff Sees Bunch of Sovereign Defaults”).
David Einhorn at Greenlight Capital recently gave a speech where he too outlined the implied value of Moody’s as a contra-indicator. In his speech at the Value Investing Congress on October 19, 2009, he captured the reality of Moody’s Perceived Wisdoms with this:
“My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody’s does not have a long term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth.”
Canadian hockey knucks to Mr. Einhorn for backing up the risk management point that both we and Ken Rogoff have signed off on. Marked-to-market prices are the best leading indicator of risk. Moody’s remains a lagging groupthink indicator, at best.
So what do we see this morning from a real-time price perspective that’s bullish?
- Greek credit default swaps (CDS) are making lower-highs
- Greek bond yields are making lower-highs
- Greek stocks are making higher-lows
Hmmm… I wonder what those who were dressed up like Marie Antoinette talking about their revisionist risk management process on CNBC yesterday have to say about that? Risk management works on both sides of the puck folks. Backcheck – Forecheck – Paycheck! Beware of those one way players Selling Fear.
I have taken this week’s global fear factor as an opportunity to invest 12% of the cash in the Asset Allocation Model into global equities and currencies. Our cash position has dropped from 67% at the beginning of the week to 55% this morning. I now have a 9% and 3% asset allocation to US and International Equities, respectively.
My immediate term support and resistance lines for the SP500 are now 1093 and 1119, respectively.
Best of luck out there today and go Canada and USA hockey tonight!
FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.
TUR – iShares Turkey — Turkey has been pounded in the last week and fears were delivered upon with the inside information of 40 retired military officers arrested on 2/24/10. We'll buy the fear for a trade. The long term TAIL for Turkey is bullish, from a price.
XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.
XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.
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.
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.
XLP – SPDR Consumer Staples —Given how many investors own Consumer Staples 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.
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.