The Principled One

“Today you cannot even do good unless you are prepared to exert your share of power, take your share of responsibility, and make your share of mistakes.”

-George Kennan

 

I flagged this quote from the book I mentioned I am in the midst of reading, “The Age of The Unthinkable.” The author, Joshua Cooper Ramo, has a deep respect for geopolitical history and, at the same time, attempts to understand the math behind how complex systems can be simplified. This, as we say at Hedgeye, is the new frontier of risk management. The interconnectedness of global macro matters.

 

I wonder what the legendary American strategist would think of the #1 headline on Bloomberg this morning: “Papandreou Will Press Obama to Support European Crackdown on Speculators.” They called George Kennan “the father of containment.” Containing said “evil doer” short sellers is hardy what he man had in mind.

 

The other George (Papandreou) is the Prime Minister of Greece. Since the Chinese told him to go fly his levered-up bureaucratic kite, Papandreou has been on a PR tour since Friday when he visited Germany.

 

Along the way, somehow he convinced France’s Nicholas Sarkozy that “speculators are creating malicious rumors” about his country. With some political wind from the left at his back, he took it up a notch ahead of meeting with Geithner today in Washington and called whoever he can’t see “unprincipled speculators.” George, you have to be kidding me. You have no idea what you don’t know.

 

First of all, hearing politicians talk about markets is like watching a southern belle try to ice fish. So I won’t waste time on ripping this poor guy a new one for using the word “speculator.” That would be too easy. It is this concept of “principles” that really has my arthritic hockey knuckles hammering on the keyboard this morning. What, almighty Principled One, in God’s good name is “principled” about levering-up your country’s balance sheet to 100% debt to GDP and a 12.4% deficit to GDP ratio?

 

President Obama, with all due respect, please heed our advice from New Haven, Connecticut this morning and send this Greek snake oil salesman home packing. American capitalism is having enough confidence problems right now – we cannot let a country like Greece, who across centuries (not just years or months) has earned the Reinhart & Rogoff title of “Serial Defaulter”, find a voice in some populist anti-Wall Street ring tone.

 

Market’s don’t lie; politicians do. Greece’s stock market is trading down a hefty -1.7% this morning, taking their YTD loss on the Greek Athex Index back to -6.1%. While we’ve seen a sharp stick to the eye short covering rally in everything dysfunctional European balance sheet (Greece up +16% from February 8th to March 8th), it doesn’t change the fact that Greece’s concept of fiscal principles is, well, “unprincipled.”

 

Despite this epic, one-month, Fear Covering rally, Greece’s intermediate term TREND remains broken. Mr. Papandreou, you can call me a speculator or a knucklehead not worthy of eating fine cheese on first class flights around the world, I will do nothing but choose to profit from your ignorance. Inclusive of this past month’s rip, the stock market in Greece has lost -29.3% of its value. ‘Tis you, dear Principled One, who Mr. Macro Market is flagging as lying, not the evil doer speculators you speak of…

 

Rather than shorting Greece, after letting the Fear Covering rally subside last week we opted to short Spain (via the EWP etf). Spain is more liquid. Spain has had less of a consensus focus from the Manic Media. And the Spanish Conquistadors of leverage have not yet landed on US political soil. Spain’s IBEX index is trading down -1.3% so far this morning and the intermediate term TREND line that we flagged for you yesterday (11,394) remains broken.

 

The Principled One and his first class travelling band of storytellers can whine all they want about being called PIGS. Its an acronym Wall Street is using to shorten a long term balance sheet problem. But the problem isn’t going away once he flies back to Athens. Real pigs don’t fly, but they do whine and squeal. At least they don’t attempt to walk on the moral high grounds of a “principled” trough.

 

We called out Sovereign Debt risks in December of last year. Our fundamental view has not changed (see our blue-liner, Daryl Jones’, article on Fortune.com this morning for the update). Only market prices and the storytelling around those prices have. While hope is not an investment process, that’s all we have left when we think about investors understanding that managing risk doesn’t happen in a vacuum, nor does it only work one way.

 

Today is the anniversary of last year’s stock market bottom and also the publishing of Wealth of Nations in 1776. Cheers to the real American risk managers out there like George Kennan of seasons past, and those who are using the inferred principles of Complexity Theory in their daily risk management models today. At least we can trust the science of mathematical principles, to a point.

 

My immediate term TRADE lines of support and resistance for the SP500 are now 1118 and 1143, respectively. We shorted the SP500 at 1139 on Friday and we bought volatility (VXX) into yesterday’s complacent close.

 

Best of luck out there today,

KM

 

LONG ETFS

 

VXX – iPath VIX — Volatility (as measured by the VIX) has lost 1/3 of its implied value since February 8th (when both Greece and the US stock markets put in short term lows). We’re not buyers of complacency; more buyers of short selling fear.

 

XLK – SPDR Technology — A down day on 2/22/10 prompted us to buy more XLK. 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.
 

SHORT ETFS

 

SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.

 

EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE again on 3/5 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.

 

IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.

 

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 Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.

   

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.


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