“There are two levers for moving men: interest and fear.”
-Napoleon Bonaparte
I wake-up each morning not really knowing what I am going to write. We are, after all, data-dependent here at Hedgeye – and contrary to Washington revisionist economist beliefs, the data does in fact change, real-time. On the heels of another politically-packed weekend in the bubble that we call US Politics, I feel like quoting the little French man who lived in his own political bubble is appropriate.
Napoleon’s levers of “interest and fear” are very much what are driving markets in here in March. Fear in the short selling community drove us to last week’s year-to-date highs on Wednesday in as much as fear of higher interest rates drove the SP500 down from those nosebleed highs on Friday.
Since the March 9th, 2009 Great Depressionista low of 676, the SP500 is up +71.4%. Since the February 2010 closing low of 1057 the US market is up +9.6%. This all ends in fear. Fear of missing the next move higher, and fear of being short squeezed are one and the same.
The fear of the unknown wreaks havoc on the minds of the insecure. This is certainly how I used to feel every morning when my job retention exercise included shorting stocks. I was inexperienced and naïve. The thought that people actually traded on inside information initially seemed far-fetched. It’s a good thing I thought that through again, and again, and again. I learned by watching what people were doing as opposed to what they were saying.
The sad reality is that some people trade on inside information every day. The government sponsors this kind of risk taking. Insider trading is rarely unearthed, and you can become a billionaire in this country if you don’t get caught.
The best way to combat the fear in your mind that someone either knows something that you don’t know (or that they think they know something you don’t know) is to let Mr. Macro Market tell you the truth.
Let’s think about this with a real-time example that’s moving the market every hour right now: the Fed raising interest rates.
If you didn’t know that yields on the short end of the curve did nothing but go straight up since Ben Bernanke delivered the goods for the levered-up-on-zero-percent-money bulls last Tuesday, pull up the chart – now you know.
“Rumors” about the Fed raising the Discount Rate started to really surface on Thursday morning. The Fed at one point even came out saying they don’t comment on rumors. Translation: someone knows something they shouldn’t know.
By Friday, SP500 started to come under much more serious selling pressure (volume was up +23% day-over-day), and this morning you can see that the US Equity futures are once again worried about the same – a rate hike.
If I could, I would get a microphone in front of Mr. Bernanke this morning and ask him how much longer he plans on keeping this unreasonable and unsustainable policy of “extended and exceptional”, but that’s not something people like me get access to.
So what to do with all this inside information? Well, we commoners can wait until Thursday when Bernanke testifies on his “exit strategies” in front of the House Financial Services Committee, or we can let Mr. Macro Market give us a look-see into what these conflicted and compromised politicians are already leaking to the people who pay for their political futures.
Mr. Macro Market doesn’t lie; politicians do. Interest rates on 2-year US Treasuries broke out to the upside on Friday, closing at 0.99%. While there wasn’t any “news” on the tape, there really was – or at least a lot of people who move around a lot of money out there thought there was.
Understanding the fears and economic interest that some big players in this market have in getting the timing right should never be underestimated. There was a day when we could hope Americans didn’t sign off on this kind of behavior by market participants. Names like Fuld, Madoff, and Stanford unfortunately changed that. Hope that all people play this game by the rules is not an investment process.
My immediate term downside support levels for the SP500 are 1054 and 1037, respectively. Unless Bernanke comes out and refutes that he is going to be changing his monetary policy today, I suggest you manage risk around those lines. For now, the highs for 2010 YTD appear to be in.
Best of luck out there today,
KM
LONG ETFS
VXX – iPath S&P 500 VIX — With the VIX down -38% since the SP500 bottomed -10.2% lower on February 8th, now (3/17/10) is a good time to buy some volatility for the immediate term TRADE as it is oversold.
USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.
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
MUB – iShares National Municipal Bond Index — The Hedgeye Macro Team held a conference call on Sovereign Debt in which we discussed how to profit from understanding it from here. We said that we were waiting for another up day in Municipal Bonds to short into, which we got on 3/19/10.
HYG – iShares High Yield Corporate Bond — Suffice to say, we aren't yield chasers with High Yield priced up here. There is a big difference between high-grade and high-yield; some hopefully learned this lesson back in 2007. We shorted HYG on 3/17/10.
XLP – SPDR Consumer Staples — Consumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.
EWP – iShares Spain — The 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 added to our short position for a TRADE on 3/5 and 3/17 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 2000 — With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10, we shorted IWM and added to the position on 3/2 and 3/17.
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.
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.
