The Joy of Winning

“I'm trying to learn as much as I can out there, but I'm confident in what I can do.”

-Sidney Crosby


Sidney Crosby is a 22 year-old from Cole Harbour, Nova Scotia. Sometimes it’s hard to contextualize how young some of these national leaders are, but youth is ambition’s ladder and it’s important to take the time to embrace.


The Vancouver Olympics inspired us to live with passion and pride. Between Americans and Canadians, new Olympic records for total medals (USA’s 37) and gold medals (Canada’s 14) were set, and the leadership infused into all of our living rooms for the past few weeks goes well beyond one man’s goal.


Immediately after the hockey game, Sidney Crosby said “there's nothing really that goes through your mind besides the joy of winning and to be able to share that with the guys and all of Canada.” I’ll take that one step further Sidney – I think all of Olympic sport shared it with all of the world. We needed that. To all of the champions of Vancouver 2010, from all of us, thank you.


“The Joy of Winning” is something we can all can sign up for. Enough of the fear-mongering and threats of the “alternative” that this world’s politicians use as a backboard for their losing strategies. Enough of Selling Fear to our marketplace. Enough is enough. Winners don’t whine. Winners win.


Stock markets across the world opened strong this morning, and I have to believe there is a much greater power in all of this than what the Prime Minister of Greece had to say. His conflicted and compromised stock market has lost 1/3 of its value already. He is yesterday’s losing news.


From China to India, whose stock markets were up +1.2% and +1.1%, respectively, to the rally we are seeing from Turkey (+2.2%) to Germany (1.6%) this morning, is there time for us to celebrate that we don’t have to live in the fear that our politicians create?


China’s February PMI (Producer Manufacturing Index) hit a one-year low last night, coming in at 52 versus 55.8 reported in January. This was proactively predictable (we predicted it on slide 1 of our Chinese Ox in a Box presentation 2 months ago), and the Chinese stock market has obviously been discounting this slowdown for the better part of 2010. Thankfully, markets look forward, like winners do.


Are the lows for the Chinese, Spanish, and Greek stock markets for 2010 locked into the rear-view mirror? For the immediate to intermediate term, the answer to that question seems to be very likely.


Here’s what history tells us about recent stock market bottoms and how people Selling Fear see them after the fact:

  1. China’s Shanghai Composite saw its YTD low established on February 2nd at 2934 (-5.2% lower)
  2. Spain’s IBEX 35 Index saw its YTD low established on February 5th at 10,103 (-3.2% lower)
  3. Greece’s ATHEX Index saw its YTD low established on February 8th at 1806 (-8.0% lower)

Today is March the 1st, and those who sold the aforementioned fear-mongered lows may very well be feeling shame, as they should. Forward me another You Tube video of an empty Chinese city. I doubt I’ll be shorting Chinese stocks on that tomorrow. Consensus is what consensus does. It’s often a loser’s game.


Managing risk doesn’t happen in the vacuum that the manic media creates. Managing risk doesn’t happen when living in fear. Managing risk doesn’t only happen on the way down.


Managing risk happens when the proactively prepared have the “confidence in what they can do”, but at the same time maintain an attitude to “try and learn as much as they can out there.” Thank you again and again, Mr. Crosby, for teaching us all that.


My immediate term risk/reward levels of support and resistance for the SP500 are now 1092 and 1113, respectively.


Best of luck out there today,





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 StaplesGiven 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 TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.

The Week Ahead

The Economic Data calendar for the week of the 1st of March through the 5th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

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Greece: March 9th Global Macro event

On March 9th, Greece’s Prime Minister will be visiting the USA. In addition to meeting with Merkel in Germany on March 5th this, on the margin, is another bullish catalyst for Greek stocks (bearish for Greek CDS and bond yields) which look poised to make a series of higher-lows in the coming weeks.


Fashionable Fears are now locked in with yesterday’s fears associated with a Moody’s downgrade (see our Early Look note from this morning for a more detailed analysis of the same).


Everything that matters to our macro risk management process happens on the margin.



Keith R. McCullough
Chief Executive Officer


Greece: March 9th Global Macro event - gh


We are cautious on the consumer and SHORT housing.


Over the last two weeks the incremental data points on jobs, housing and consumer sentiment have all been incrementally more negative.  Ironically, the government reported the U.S. economy expanded at a 5.9% annual rate in 4Q09, more than what was reported last month.  The improvement in the GDP number is reflecting stronger business investment and a greater contribution from inventories and not an improvement in consumer spending.


The University of Michigan final index of consumer sentiment for February fell to 73.6 from 74.4 in January.  Breaking down the index, the measure of current conditions, which reflects Americans’ perceptions of their own finances, rose to 81.8 this month from 81.1 in January.  The index of expectations six months from now, which projects the direction of consumer spending, dropped to 68.4 from 70.1 in January. The preliminary February reading was 66.9.


Putting in context the decline in the expectations component it’s not surprising that the last two data points on housing have been to the down side. 


Earlier this week sales of new homes fell in January to the lowest level on record.  New home purchases declined 11% to an annual pace of 309,000, as the median sales price dropped 2.4% from January 2009.  The supply of unsold homes increased to 9.1 month’s worth, the highest since May 2009. 


In isolation, the decline in new home sales can be explained away by the supply and favorable prices on “nearly new” homes that are being sold on foreclosure.  The manufacturers of new homes can’t compete with a bank that does not want an ever growing supply of foreclosed homes on its balance sheet.


 Unfortunately the news on resales is not looking much better.  Today the NAR reported that resale of U.S. homes fell 7.2% in January to a seasonally adjusted annual rate of 5.05 million; the lowest in seven months.  The sales of existing homes have now fallen for two consecutive months.  


Seasonality issues are currently playing into the depressed numbers, and the spring selling season should add some lift to the current trends, but that will be the gasp of air.  



Howard Penney
Managing Director








Rogoff’s Two Percent Prediction

We have enjoyed reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.  In fact, we have often quoted the astute historical studies in this book over the past quarter.  That said, we were taken aback by some recent statements by Kenneth Rogoff.  According to Bloomberg:


“China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt- fueled bubble” within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff.”


In the hypothetical everything is of course possible, but  what is concerning about this prognostication is that it does not seem to be based on any of Rogoff’s fine quantitative studies.  By making this statement, Rogoff is suggesting that Chinese growth decelerating to a level of 2% is in the realm of real possibility.


Below we’ve charted Chinese GDP growth over the past 20-years.  The story from this chart is actually quite simply that a deceleration to of GDP growth to 2% would be way out there on the tails of probability.  While certainly not impossible, Rogoff’s statement reeks more of that of fear mongering than an accurate assessment of probability.  Over this time period, China’s GDP has average 9.2% and the range has been between 3.8% and 13.5%.  So 2% . . . possible, but probable? We aren’t so sure.


In terms of context, it is also critical that this period of Chinese growth includes a massive debt bubble.  In fact, according to Reinhart and Rogoff, in the late 1990s:


"China's four large state owned banks, with 68% of banking system assets, were deemed insolvent.  Banking system nonperforming loans were estimated at 50%." 


So, despite the Chinese financial system basically being insolvent in the late 1990s, Chinese GDP never dipped below 6%!


We certainly mean no disrespect to Professor Rogoff, but as we have found, and not dissimilar to his analysis of rating agencies, when academics start to call the markets, it is more often than not a contrary indicator.  Not a shot at Rogoff, but just a fact of reality. Timing is everything in this business.


Daryl G. Jones

Managing Director


Rogoff’s Two Percent Prediction - china29


Early Look

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