JS Global Macro Notes

[darkhorse]

Global Macro Notes: The Fed is Simply Adding More Bricks to the Wall

A wave of QE2 euphoria has washed over markets like a syringe full of heroin hitting a grateful junkie's bloodstream.

Some assert that the wave could well continue, as we enter the seasonally strong Nov - Dec period for markets and marginalized bond investors look on the equity bonanza with longing.

A further rush of upside would do us just fine, as we ride the wave with precious metals names and an assortment of other carefully selected longs.

At the same time, though, we inch ever closer to the door by systematically building out short positions, particularly in names that have been 'acting right'...

Though there is good money to be made on the long side, one cannot know how long that will remain the case. (Weeks? Months? Days? Already over by the time you read this?)

One CAN see with a fair degree of clarity, however, that the Federal Reserve is merely driving markets toward a brick wall... with the inevitable collision set to be a horrendous one.

The numerous "bricks" in this looming wall include:

* failure to stimulate the real U.S. economy
* the death of credibility for the Federal Reserve
* rising anger (bordering on rage) at pro-inflationary policies
* foreclosure-enhanced odds of a housing double dip
* a breathtakingly oversold $USD threatening to surge
* looming "currency war" (full-on trade war?) with China
* austerity-induced self-asphyxiation in Europe

The motto of the bulls thus well might be: "Eat, drink and be merry, for tomorrow we die (or at least face reality)"...

Go here for full Global Macro Notes

 

[darkhorse]

Weekender / Links Roundup: Stick and Move

For traders, rarely has there been a better time to be flexible and agnostic. Right now the whole market complex is keying off the breathless anticipation of what one guy might do.

And we really can't be sure what he will do. To give but one example, the "spread" of QE2 expectations when the Fed acts in November ranges from $100 billion to $1.5 trillion. At one end of the scale, crushing disappointment; at the other, party-hearty blowout.

On top of that, the market is besieged by a host of unknowns.

The foreclosure fiasco might derail everything -- then again it might not.

Solid earnings plus QE2 tailwinds might propel the market higher for the rest of the year -- then again they might not.

The "currency wars" might lead to international crisis -- then again they might not.

You can't count on anything here, not even volatility -- after all, a "bulls win" scenario is one in which vol evaporates as the markets grind higher.

The trading solution? Be prepared for the full range of outcomes. Develop a roster of attractive longs and attractive shorts on an absolute basis, keep the risk on a tight leash, and let come what may.

In boxing parlance, the operating term here is "stick and move." When conditions are highly uncertain, you avoid throwing haymakers. A heavy punch carries too much danger of exposure if your swing misses the mark. So you dodge and weave, jab and step back, staying light on your feet until greater clarity arises...

Go here for full links roundup

 

[darkhorse]

Global Macro Notes: Cashing in on ForeclosureGate

As of last week's notes, our largest concentration was in gold and silver stocks (via GDX plus a select assortment of names).

Those positions were stopped out for sizable profits on Tuesday, when China threw an elbow (in the form of a surprise rate hike) and the $USD surged.

Meanwhile, as the foreclosure drama unfolds, Bank of America's pain has been transformed into gain for rental income and mortgage-guaranty related names.

Our largest concentration of thematic exposure, as of this writing, is thus in foreclosure related positions -- including AGO long and a timely BAC short -- plus a sizable short in crude oil.

Though the rally was briefly thrown in doubt by China's rate hike cool-down effort, the bulls quickly reconsidered and elected to "party on." The bullet-proof reputation of the QE2 rally was arguably enhanced by the passing of this little test.

We say "let the good times roll," happily accruing gains on blue chips and long-side foreclosure related names, while quietly preparing to turn on a dime.

Mr. Market has paid little heed to the message embedded in China's rate hike and the dollar's stirring, but at some point (perhaps before too long) that message could be made violently clear...

Go here for full notes

 

[darkhorse]

Weekender / links roundup: Potemkin Village

If you look up "Potemkin Village" on Google, here are some definitions that come up:

* something that seems impressive but in fact lacks substance

* Potemkin villages were purportedly fake settlements erected at the direction of Russian minister Grigory Potyomkin to fool Empress Catherine II during her visit to Crimea in 1787.

* Any false construct devised to disguise a shortcoming or improve appearances

* An impressive facade or display that hides an undesirable fact or state; a false front.

I couldn't help but think of that definition on reading "Chinese City Has Many Buildings, But Few People:"

Broad boulevards are unimpeded by traffic in the new district, called Kangbashi New Are. Office buildings stand vacant. Pedestrians are in short supply. And weeds are beginning to sprout up in luxury villa developments that are devoid of residents.

"It's pretty lonely here," says a woman named Li Li, the marketing manager of an elegant restaurant in Kangbashi's mostly vacant Lido Hotel. "Most of the people who come to our restaurant are government officials and their guests. There aren't any common residents around here."

City leaders, cheered on by aggressive developers, had hoped to turn Ordos into a Chinese version of Dubai -- transforming vast plots of the arid, Mongolian steppe into a thriving metropolis. They even invested over $1 billion in their visionary project.

But four years after the city government was transplanted to Kangbashi, and with tens of thousands of houses and dozens of office buildings now completed, the 12-square-mile area has been derided in the state-run newspaper China Daily as a "ghost town" monument to excess and misplaced optimism.

A Chinese version of Dubai? For serious?

They do, uh, know what happened in Dubai right?

Go here for full links roundup

 

[darkhorse]

Global Macro Notes: Time to Short the British Pound?

Eighteen years ago, George Soros famously gained his reputation as "the man who broke the Bank of England."

In a bearish British pound trade conceived by the great Stan Druckenmiller, Soros' Quantum Fund made more than a billion dollars in one day in 1992.

As expertly recounted by Sebastian Mallaby in "More Money Than God," John Major and the hapless British government fought tooth and nail at the time to keep the pound from being devalued.

It was a fight they ultimately lost to Soros and the "speculators" -- and Britain was the better for it, given the strain exerted on the U.K. economy by an irrational commitment to the ERM (European Exchange Rate Mechanism).

Today, the British pound may be setting up for another excellent shorting opportunity -- with an important twist. The government and the BOE (Bank of England) are not as likely to fight a sharp devaluation this time... and may in fact encourage it.

Go here for full Global Macro Notes

 

[darkhorse]

Weekender / Links Roundup: Trick or Trade

Trick or treat, smell my feet, give me something good to eat...

Trick or trade, long or fade, bulls or bears will soon get played...

Were I a fresh-faced trick-or-treater roaming the swanky neighborhoods of Greenwich, Connecticut -- i.e. the hedgie capital of the world -- I would do so in a Ben Bernanke devil mask.

Then, whenever a leveraged long fund manager opened the door, I would shout in my best Seinfeld-Soup-Nazi voice: "No QE for you!!!"

In all seriousness, betting on a "QE2 comes through" rally continuation here feels like backing the heavy favorite at the Kentucky Derby. Sure your horse has the chops to win -- but the reward to risk is lousy, expectations are nosebleed high, and the dark horse bet offers a much better payout. (Remember Big Brown?)

With investor sentiment at its most bullish in two years, the crowd seems convinced Bernanke will come through for the bulls. Having already anticipated all kinds of good juju and inflationary effects of the not-yet-arrived QE2, Mr. Market is effectively taking the "over" on Wednesday's big announcement. But if we get the "under," what then?

Go here for full links roundup

 

[darkhorse]

Integrated Macro Analysis Series

For those with interest, the Integrated Macro Analysis series is now complete:

* IMA Part I: 3-D Structures and General Conditions

* IMA Part II: The Market Tower

* IMA Part III: Horizontal & Vertical Exposure

 

[darkhorse]

Global Macro Notes: Winners and Losers in the Fed's Inflation Game

It is now "the day after," and commodities have gone insane.

As of this writing, mid-morning on November 4th, crude oil is up 2%. Gold and copper are both up more than 3%.

The Federal Reserve has expressed a desire to create positive inflation. What they are creating, instead, is a sort of non-optional material inputs tax -- a hard asset rocket ride -- that divides the playing field into smiling winners and snarling losers.

Among the winners:

* Commodity producers
* Precious metals dealers
* Hard asset related businesses
* Companies with 'pricing power'

And the losers:

* End-users of commodities
* U.S. savers and consumers
* Companies with no 'pricing power'
* Anyone who eats food, heats their home, or drives a car

The risk at this juncture is immense, not just to the U.S. economy but to the Federal Reserve itself.

For most of its roughly 100-year existence, the Federal Reserve has seen its activity wreathed in shadows. Now, by enacting this "bold experimental plan" that the whole world can see will not work -- in terms of the desired impact on unemployment -- the Bernanke Fed is exposing itself to harsh public review.

And it is doing so by saying to the American public: "Here is the smiling bearded man who thinks he is helping you by causing your gas and grocery bills to double."

Given Mr. Market's reaction, the post-QE game plan is fairly simple:

* "Ride the wave" with PM miners, commodity producers, and other advantaged names.
* Maintain a short bias towards the "losers" in the Fed's doomed equation.
* Apply the caution and dexterity requisite to mania conditions.

View full Global Macro Notes here

 

[darkhorse]

Weekender / Links Roundup: Swan Spotting

My favorite piece of research this week: A power-point presentation called "China -- The Mother of All Grey Swans" by Vitaliy Katsenelson.

Over the course of 50+ well-researched slides, Katsenelson makes a powerful argument as to why China (and secondarily Japan) is an artificially supported, government orchestrated, large-scale disaster just waiting to happen.

Does this mean it's time to run out and short China in size? By no means. Patience is a virtue, especially when the bulls are getting high on their own supply.

With Citigroup talking about a "Super-Goldilocks" E.M. environment, and "death of the dollar" prognosticators straining to pat themselves on the back, there is no clear impetus, at least for now, to stop riding the prevailing bullish trends (let alone step in front of them).

But "right now" is still a very good time, with much of Wall Street celebrating, to be on the lookout for "gray swans" (to use the U.S. spelling) that could powerfully reverse today's course...

View full links roundup here

 

[m22au]

thanks Darkhorse