“Success depends upon previous preparation, and without such preparation there is sure to be failure.”
-Confucius
Proactive preparation continues to allow us to profit from some of the best short squeezes in US stock market history. Those attempting to manage other people’s money reactively have their own predictable issues to deal with. The longer we keep them, Goldman, and Citigroup in the game, the better. Without the crisis’s that they perpetuate, we would never be able to “Trade” US Equities from the long side as aggressively. I would never get the terms I just got on a CA office lease. This is the “New Reality.”
Fortuitously, in our Early Look from Friday morning (“Studying History” www.researchedgellc.com, 11/21/08) I took the shot and made the call that I saw an immediate term “Trade” opportunity for the S&P500 to test 858 (14% higher). Yesterday’s market traded above that line intraday, and we started to sell into it. Call it my luck, or call it my process – I am cool with either. Most people in this business claim that “you can’t make market calls.” I agree, wholeheartedly… most of them can’t. However, with the right process, “Yes, We Can.”
Economic history buffs can mark down the last 2 days of US trading as the biggest two-day rally in the S&P500 since 1987. Don’t we all feel great about some of our long positions now? Or are some of you feeling shame having shorted the US Financials 2 days ago, prior to their +19% move? I for one wish I’d covered our Morgan Stanley short position in the ‘Hedgeye Portfolio’ on Friday, but I didn’t… and the ‘You Tube’ replay doesn’t have that “Investment Banking Inc.” editing feature. We stand on our own decisions every day in this business and we should be transparently accountable for all of them.
Prince Alalweed seemed ready and willing to be ‘You Tubed’ yesterday on CNBC’s power hour lunch, or whatever it’s called… that segment where they have the “money honey”, Maria Bartiromo, enlighten us with her very serious sounding “exclusive interviews”. Prior to my securing a buck a foot lease yesterday from a Lehman project that’s distressed (buy low), I was entertained by the Prince who was front center, being interviewed about Citigroup.
The Saudi Prince is a 5% holder in the company – did we need an “exclusive” on proactively predicting that he would step up and push his own book? What did we expect the man to say, other than he loves the idea of US government bailout money? The man was sitting in the middle of the desert in a Four Seasons looking chair, wearing Paris Hilton shades and some sort of scarf with a leather vest. There were camels and horses, and a Western looking campfire burning in the background. Fully loaded with Maria’s line of ingenious analytical drama, I felt like I was watching Young and The Restless.
Unfortunately, the global mania in stock markets has not been fully washed out. The aforementioned live episode from Riyadh, Saudi Arabia is a metaphor for the ridiculous. Do not mistake the last 2 days of a short squeeze for a fundamental change in the US stock market’s negative intermediate “Trend.” The Prince coming to his drowning equity portfolio’s rescue while “Pirates” are stealing his country’s oil ships is what it is. It should be understood, and taken advantage of – not mistaken for research edge.
This morning is the first one in November where the downside risks to the US stock market outweigh the upside reward. My upside target for the S&P500 is 901, and my downside test level is 751. The math here isn’t as trivial as Alalweed’s new look. We’re looking at -12% downside versus 6% upside. With the US Dollar getting hammered yesterday, commodities zoomed higher alongside stocks… so I sold down our US Equity exposure to 12%, and invested in a bond for the 1st time in 2008 (TIP, Treasury Inflation Protected bond fund).
On balance, I don’t like bonds yet because I think long term cost of capital will continue to increase in 2009 as access to capital continues to tighten. Ask the government of Pakistan how these new bailout terms from the IMF feel. They had to raise rates to 15% just so that they could get the money and save their debt from defaulting. Sound familiar? Yes, this sounds like one of our favorite shorts this year, MGM Casinos, who had to pay the same rate for their most recent $750M in financing. Have no fear though… there are surely a lot of newly unemployed dudes wearing those shades that the Prince had on yesterday that are getting all amped up to roll the bones and stoke a resurgence in the table hold at the Bellagio!
The TIP bond fund pays us a 10.5% yield and is a call option on the US government doing everything in their power to re-flate their way out of this deflationary spiral. This has always been in the “Heli-Ben” playbook. This is why the Commodities CRB index had a melt-up +5.1% day yesterday. Every day that we move closer to December is one more closer to free money US interest rates. Free money is as cool as those shades that the “money honey” was digging yesterday on the E! Channel’s new competitor in “The New Reality”. Capitalize on manic behavior. Buy low. Sell high.
Best of luck out there today.
Long ETFs
TIP –iShares Lehman TIPS Bond --10 Year Yields dropped 11 basis points to 3.22 yesterday in advance of today’s Treasury Dept./Federal Reserve announcement.
OIL iPath ETN Crude Oil –Front Month Light Crude futures fell below 52.50 in early morning trading. In an interview yesterday Venezuela’s Oil minister strongly endorsed a further one million barrel a day reduction by OPEC in advance of the producing nations meeting in Cairo this weekend
EWA –iShares Australia – The ASX 200 Index gained 198.30 points, or 5.8%. BHP Billiton (EWA: 13.5%) announced an end to its attempt to acquire Rio Tinto Group (EWA: 3.18%) citing commodity price declines and difficulty in the debt markets. BHP rose by over 20% on the announcement, while Rio Tinto’s shares declined sharply –reaching level 40% lower than yesterday’s close.
EWG – iShares Germany --Q3 GDP levels release today show a declined 0.5% from Q2 while exports declined by 0.4% from the last quarter. Volkswagen AG (EWG: 13.6%) declined by 14% on news that it would cease production for 3 weeks at its Wolfsburg facility due to cooling demand.
FXI –iShares China –Central Bank inflation forecasts were adjusted down to 6% for this year and as low as 3% for next on declining commodity and energy prices. The World Bank decreased its growth forecast for the Chinese economy in 2009 from 9.2% to 7.5% urging leaders there to focus on developing domestic demand.
VYM – Vanguard High Dividend Yield ETF –Yesterday’s rally in crude oil lifted shares of Chevron (VYM: 4.11%) by 5.4% and ConocoPhillips (VYM: 2.92%) by 5.7%.
Short ETFs
EWU – iShares United Kingdom – BOE Governor King said “We may not have come to the end of recapitalization,” in a speech before parliament yesterday. British Bankers Association data showed a decline of 50% for home loan approvals in October.
UUP – U.S. Dollar Index –An announcement detailing the joint Treasury Department/ Federal Reserve consumer lending package is expected in a press conference today at 10am. GDP figures will be released this morning with surveyed economists predicting a decline of over 0.5% from the prior quarter.
EWJ – iShares Japan --A BOJ report released today reduced growth forecast for the next several quarters. The Nikkei 225 rose 5.2% on the US/Citigroup bailout news to close at 8,323.93.
FXY – CurrencyShares Japanese Yen Trust – The yen rose to 96.81 per USD in trading today.