EARLY LOOK: Learning Fast

• keith
• February 22nd, 2010

“The ability to learn faster than your competitors may be only sustainable competitive advantage.”
-Arie de Geus

De Geus was a global macro man, of sorts. Born in Holland, he worked for Royal Dutch/Shell for his entire career (1951-1989) and was head of Shell Oil’s Strategic Planning Group. “The ability to learn faster than your competition” is a great way to think about what a global risk manager is tasked with every day.

Last week, I learned a lot about what one of our Top 3 Macro Themes for Q1 of 2010, Rate Run-up, might mean for global market risk. While my short US Treasuries (IEF), long US Dollar (UUP), position had another solid week, I ended up being way too light on my US Equity exposure.

Currently, I have only a 3% position in our Asset Allocation Model to US Equities. In a week where the SP500 was up +3.2%, and I was short the SPY (SP500 ETF) for -1.25% of that move, that made me wrong in that position.

While I was never in the camp that a Buck Breakout or a Rate Run-up were going to make the stock market crash, I was most definitely getting out of the way of what I thought would remain a credible, short term, marked-to-market fear. For now, the US stock market’s fears about the Fed raising the Discount Rate have proven to be fleeting.

The US Treasury market continues to see this differently – government bonds continue to sell off this morning. With 2-year yields trading up at 0.91%, the short end of the curve is breaking out from an intermediate term TREND perspective. Meanwhile, the long end of the yield curve continues to make a series of higher-lows and higher-highs. Intermediate term TREND line support for 10-year yields is down at 3.59%, so this morning’s yield of 3.79% is comfortably higher than that.

At +288 basis points wide, the spread between 10 and 2-year yields is within 2 basis points of its widest spread ever this morning. Ever, as we macro people like to say, is a very long time. Yes, even longer than 50 years, which is what Team USA ended last night with their respectable Olympic win against my homeland on the ice.

Our Hedgeyes affectionately refer to this 10’s to 2’s spread as the Piggy Banker Spread. That spread is the best way to measure the US Government’s choice to capitalize the profits of bankers rather than incomes for Americans with US Savings accounts. How long Washington can politicize and compromise the rate of return on your hard earned nest egg is up to the politicians, I guess. It may be sad, but it’s great for those preferred borrowers while they can get it.

This is obviously great for bankers looking to finance large M&A transactions with debt. Great, that is, until it isn’t. The ghost of the 2007 levered-loan market is back, and it will be interesting to watch corporate junk spreads trade in the coming weeks as volumes come back to the marketplace.

We’ve already seen 16 corporate bond deals and 15 IPOs pulled in the last month as interest rates have backed up. So the piggies who have been eating at the trough of a government sponsored spread are at least wavering. That said, if Bernanke panders in Washington this week (he testifies in front of Congress), there is no telling how hog wild the reflation trade can go again.

In the meantime, you don’t have to learn fast to understand this: $80/oil and $3.34/copper prices this morning are inflationary. Year-over-year US inflation growth is currently running up +3-5%, not including last week’s commodity price spike (CRB Commodities Index was +3.7% week-over-week).

Markets look forward, and maybe that’s exactly what the US stock market did after taking a good hard and long look at the SP500 futures trading down 10 handles on Thursday night. Maybe, just maybe, Mr. Macro Market is getting quite good at proactively predicting a Fed that panders to Japanese style political winds.

Markets don’t lie; people do. And I for one am not going to wake-up on this Monday morning pretending I don’t need to take up my long position in both individual US stocks and my US Equity asset allocation; particularly if we go back to a daily macro grind of politicians pretending there is no inflation in America. There remains a Bubble in US Politics that we have to manage risk around.

My intermediate term TREND line of resistance for the SP500 was eclipsed to the upside late last week. At 1099, now that’s a very important line of support. I have immediate term TRADE resistance up at 1119. Keep learning fast and manage the risks embedded in this improving stock market range.

Best of luck out there today,
KM

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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