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“One measure of leadership is the caliber of people who choose to follow you.”
~ Dennis Peer

Last night, at Carmen Anthony’s in New Haven, CT, I had the pleasure and the privilege to share a celebratory holiday dinner with a US financial services firm that is both hiring and growing – Research Edge, LLC. Taking a few steps back and some time to breathe has paid handsome dividends in 2008, and last night reminded me how thankful I am to have the opportunity to work alongside this caliber of people.

Unfortunately, every great “Trend” in this business gets interrupted by negative “Trades”, and metaphorically at least, my alarm clock going off this morning was an abrupt reminder of as much. The first thing I do every morning is go through my Asian and European research, and it was plain ugly. Our friends who call it “Chindia” woke up to the reality that India is a different place than China again (don’t you hate when that happens) – India printed its first negative year-over-year industrial production growth number in 15 years. Meanwhile the Eurozone printed a horrific industrial production growth number of -5.3% year-over-year.

You see, there is no real “growth” in Western Europe right now, and that’s a real problem. That’s primarily why I have stayed away from Europe and paired myself off by being long Germany versus our short the UK position. Sometimes people forget that the Euro is barely 10-years old (her birthday is January 1st). Most of the time, people forget that this is the first time this new EU team has been forced to face the facts of an auto-correlating regional downturn. As these European countries try to figure out what to do with one another, I am happy to do nothing – sometimes that’s the best thing an investor can do.

Apparently Bernie Madoff wasn’t doing nothing. If you haven’t heard this man’s name before, you will within the next 24 hours. Like the artist formerly known as the Governor of Illinois, ole Bernie isn’t wearing the Santa suit and integrity pants at his team’s holiday party.

Rather than mince words, or go off on one of my riffs about transparency, accountability and trust, I’ll leave it to Bernie to describe what he was doing with $50B large – he called it a “giant ponzi scheme.”

So my feet are on the floor early this morning, and after investing in the USA over the course of the last few weeks, I have to deal with these losers still having an impact on your life’s savings. There’s nowhere for me to run, and if there was, I wouldn’t anyway. The only way to fix this crisis of the US Financial system’s credibility, is to take the ball this morning, and run it right up the middle.

Whether you’re working for General Motors or Bank of America this morning, it’s all one and the same. You have a confidence problem because the said leadership of your company has given you no reason to trust them. If they are going to get paid to “wear the C” on their jerseys, they are going to be held accountable for all of their actions – that’s The New Reality, and I have signed up to face-off against their principles.

Principles matter, and so does the hard earned money you have hopefully saved. We have been in cash for the better part of this year, but now we are starting to invest in America because the opportunity to change all of this nonsense has come. The US government is going to do what they always do – they are going to cut interest rates to zero and devalue your currency. When there is no rate of return and my savings account is for sale, I am not going to sit on my hands and do nothing.

Why has the US Dollar gotten smoked this week? Re-read this morning’s headlines – we have billionaires running “giant ponzi schemes” and a futures market that trades on “bailout” expectations. It’s embarrassing, and this is what happens to currencies when people lose faith in those running the country. Ask the Russians or Zimbabweans how this has been working out for them.

Am I early in taking my asset allocation to US Equities to 24% this morning? You tell me. I get called a lot of things in this business – but one of those things is not being late. The SP500 is down -44% since I was “too bearish” to work for some of this country’s investment savants, and now I get to clean up their mess. I signed up for this, and after last night’s dinner with my new team, I am ready to face The New Reality head on.

My downside target in the SP500 is 814, I’ll be buying more, patiently, from last night’s close to that price. Buy low. That’s where American confidence deserves to be this morning. On the margin, we are going to do our best to improve that.

Have a great weekend,
KM

Long ETFs

SPY-S&P 500 Depository Receipts – CME front month futures sank this morning, trading as low as 832.7 before 7AM on news that the auto industry bailout failed to win Senate approval.

DIA –DIAMONDS Trust Series – CBOT front month futures sank this morning, trading as low as 8,250 before 7AM on news that the auto industry bailout failed to win Senate approval.

XLV - Health Care Select Sector SPDR –Johnson & Johnson (XLV:14.83% ) announced that the Israeli Antitrust Authority has approved JNJ’s acquisition of Omrix Biopharmaceuticals, Inc.

OIL - iPath ETN Crude Oil –Font month NYMEX Light Sweet Crude contracts declined below 45 in trading before 7 AM this morning.

EWG – iShares Germany –The DAX is down this morning 193.59 points, or 4.06%, at 4573.61, led by fears that the global recession may deepen following the rejection of the $14 billion bailout package for US carmakers by the Senate. Daimler AG (EWG: 4.29%), the world’s largest truckmaker, agreed to buy 10% of Russian commercial vehicle manufacturer giant OAO KamAZ.

EWH –iShares Hong Kong –The Hang Seng closed down today at 14758.39, or 5.48%.

 FXI –iShares China – Retail sales numbers slid in China at the slowest pace in nine months. Sales slowed to 20.8% in November Y/Y after gaining 22% in October Y/Y. The CSI300 closed down today to 1960.38, or 4.20%. The central banks of China, Korea and Japan announced this week an agreement to ensure currency stability in Asia.


Short ETFs

EWU – iShares United Kingdom –The FTSE100 is trading down this morning at 4249.42., or 3.17%. HBOS Plc, the UK bank that agreed to a takeover by Lloyds TSB Group, said this year’s charge for bad loans rose to $7.5 billion.

FXY – CurrencyShares Japanese Yen Trust –The dollar slumped to 88.53 Yen, the lowest level since August 2, 1995, before trading at 90.32 as of 9am in London.

EWY– iShares South Korea – South Korea and Japan will increase existing Won-Yen arrangements to $20 billion from $3 billlion.

IFN The India Fund-India’s industrial production fell for the first time in 15 years, with output at factories, utilities and mines dropping 0.4% in October Y/Y after a 5.45% gain in September Y/Y.