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EARLY LOOK: Squirming Bulls

Some macro views...

 
 

Sent to you by Dominic via Google Reader:

 
 

via Hedgeye Blog by keith on 6/24/10

"When you're finished changing, you're finished."
-Benjamin Franklin

My citing a Thomas Jefferson quote yesterday certainly stirred the pot. I haven't had that many responses to an Early Look note since I took the other side of Barton Biggs (on May 27, 2010 after Biggs suggested that the Thunder Bay Bear was going to "squirm"). I appreciate all the feedback.

After getting plugged chasing a made for Manic TV CNBC "China" rally on Monday morning, and then seeing the SP500 close down for 3 consecutive days, the bulls are the ones doing the squirming now. The US stock market hasn't had 3 consecutive up days since April.

Jefferson, like most politicians, was a professional storyteller, prone to hypocrisy, and subject to squirming. We know that markets don't lie; politicians do. What we don't know is why the Modern Day Roman Empire that is America's financial system continues to believe that the rest of the world isn't watching?

From a financial forecasting perspective, the Fiat Fools in Washington have proven that they are finished changing. So, in this brave new political era where the President of the United States is telling stories about "holding people accountable", we're going to tag along Benjamin Franklin's aforementioned quote and assume the current US monetary policy experiment is "finished."

Sadly, in what has become a proactively predictable statement of politically conflicted US Federal Reserve policy, in yesterday's FOMC statement Ben Bernanke opted to pander to the political wind that has amplified both the volatility of markets and the cyclicality of growth since he took his lead from Alan Greenspan.

Our advice yesterday (for the US government to become Rigorously Frugal) was born out of the respect we have for both the cost and access to capital. Promising a "risk free" rate of return of ZERO percent to both domestic and foreign investors will not inspire investment. We live in an interconnected world where capital seeks yield. Ask the Brazilians and Chinese what they think about that…

Whatever you do, don't ask Ben Bernanke and his Troubadour of the Willfully Blind at the Federal Reserve for an economic forecast. If he didn't see economic growth and inflation in the last 12 months he's definitely not going to see it now. Like a broken clock, he'll eventually get it right – the double dip we are forecasting for both the US economy and US housing will be here come Q4. By then, Bernanke will be formally cutting his economic forecasts.

As a reminder, Bernanke's forecasts on US economic growth are about as far out in the stratosphere of nod as we have seen in some time. That said, given his outlook, he should have the Fed Funds Rate at least 100 basis points higher than where it stands today (he is looking for upwards of 4% GDP growth in the US in 2011). So it's time he either raises rates in line with his forecast or just takes a chainsaw to his forecasts.

Let's think about those two options for a second:

1. Raising Rates – since he couldn't raise them when he should have, now he won't be able to cut them when he needs to. The yield on 2-year US Treasuries is hitting all time lows this morning of 0.64%. If one of the brave economists in Washington wants to tell me a story about how the US Treasury market is forecasting anything other than a double dip, please send me an email.

2. Cutting Forecasts – since Bernanke's forecasts are turning into THE lagging global economic indicator, it is very probable that he cuts his economic forecasts in the coming quarters. By the time he does that, most of the Squirming Bulls are going to be looking back in the rear-view mirror at a US "growth and earnings" story that slowed (most recent sales updates from BBY, TOL, FDX, BBBY, etc are on the tape – they weren't good).

If you are finished learning, you're definitely finished thinking. How does Heli-Ben think about the interconnectedness of global markets? Where does the most relevant mathematical consideration since relativity (chaos/complexity theory) fit within his forecasting model? Do real-time market moves register on his radar or is he still busy marking-his-estimates-to-the-broken-Greenspan-model?

Don't ask Timmy Geithner for a bone on these answers either – he'll be the first to tell you that he is "not an economist." He's simply a professional politician advising the President of the United States on global economic matters.

Since the Chinese signaled that they'll continue to wear the pants in this Global Creditor/Debtor relationship earlier this week, we have seen the three pillars of US economic growth hopes crumble: Industrials, Financials, and Consumer Discretionary (XLI, XLF, and XLY are the ETFs).

After holding their breath barely below this bear market's water for the last 3 weeks, these 3 critical sectors (XLI, XLF, and XLY) in our S&P Sector Risk Management Model have broken on both an immediate term TRADE and intermediate term TREND perspective. These are called leading indicators, Mr. Bernanke. If you want some help, please send us an email at sales@hedgeye.com.

Other than collapsing US bond yields and US stock prices, what other global macro leading indicators have us forecasting double dips in both US housing and US economic growth?

1. Chinese equities are down -21.7% YTD and have closed down the last 2 days

2. Dr. Copper (a proxy for Chinese demand and US Industrial growth) remains broken from a long term TAIL perspective

3. European equities continue to sell off this morning after rallying to lower-long-term highs in the last 2 weeks

Now if you don't believe in the interconnectivity of global markets, complexity theory, or that the US growth engine isn't tied to both, you won't believe any of my storytelling this morning. If you're finished reading, you're not finished figuring this out yet.

My immediate term support and resistance levels for the SP500 are now 1081 and 1105 respectively. I sold 1/2 of our position in TIPs in the Hedgeye Asset Allocation Model yesterday, taking our allocation to Bonds back down to 6% from 9%, because a negative growth outlook is deflationary, in theory. Our allocation to cash bumped back up to 64% from 61% day-over-day.

Best of luck out there today,
KM


 
 

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