Re-Flate! - asset allocation122908

"To be wronged is nothing unless you continue to remember it."

For many, it has been a long hard year. Being a record setting 0-16 Detroit Lions, or being down as much as the SP500 year to date (-41%) is actually nothing now, "unless you continue to remember it." In t-minus 3 trading days, both levered long Portfolio Managers and NFL coaches missing the post season get to move out of the way. For many of their investors and fans, it can only get better from here. Don't forget, everything that matters in markets happens on the margin!

Rather than pointing fingers and getting bogged down by the rear view mirror, this is a great moment in American history to look forward. This is quickly developing into one of the greatest opportunities that American Capitalists who proactively prepared will ever see. US Equities are on track to lock in their best sale prices since 1931, oil prices have dropped -76% in the last 6 months, and interest rates around the world are going to zero. Can you imagine what the "it's global this time" bulls would have done with a fact-based economic narrative like that? Actually, we don't want to go there... we might find a whole band of Bernie's.

Fortunately for him, Bernie didn't quite find his way to Russian or Asian coffers. Rather than bouncing reporters on Park Avenue, he would have had himself quite the situation to deal with. The best news about the moral-less Madoff story is that it too will find its way out of the mass media in the New Year. That, on the margin, is also a bullish catalyst for markets.

Israel raining down on a region where there are 1.5 million Palestinian civilians has not been able to shake the boots of The New Reality investor. Neither has Pakistan deploying tens of thousands of troops to the Indian border. Weekend at Bernie's New York apartment looks tame compared these geopolitical risk sirens, but markets find a way of discounting news before it happens. You don't need an SEC that actually looks for insider trading anymore - if you watch markets and stocks closely enough, you'll see plenty of it revealed before the mass media rehashes it.

Thankfully, we bought oil into its vortex of year-end dismantling. This isn't about "year-end selling" - that's over with. This is about dismantling... and now, as a result, you can find plenty a "prop energy trading desk" being sold on EBay. Like the Lions NFL season, thank God it's over. Having to deal with the "he said, she said" nonsense of some of these vaunted institutional jungle gyms was making me nauseous. Now, volatility is coming down as fast as employment in this segment of the financial services sector. The VIX was down another -3.4% last week, taking its cumulative cliff diving score to -46% from its manic peak.

My asset allocation model went to 14% in Commodities last week. I was thankful for the blessings of family at Christmas, and many of the tidings that came alongside Wall Street's cycle crashing. Buying oil under $40/barrel was something that doesn't make sense until it does. This morning, like many other mornings on the interconnected planet called Earth, those who sell oil low are reminded that the price of oil has a geopolitical risk premium. Some mornings it is more obvious than others - but wherever you wake up in this world, there it is.

I have dropped my asset allocation to Cash down to 44%, and that's very close to its lowest level of 2008. With only three trading days left, I had to splurge on some of these holiday deals. The "shop till you drop" mantra of many moons past is really quite cool, particularly when there are no lines. The US Dollar continues to get hammered, because ... well, the US Government has decided to devalue it. This decision by our politicized Federal Reserve is not unlike the one that Nationalist hero Vlady Putin has made. When in doubt, devalue - and "Re-flate."

With the US Dollar index trading down another -1.5% this morning to 79.53, our decision to short it on Friday is making our clients smile. This exercise isn't that complicated. "Re-flation" is what you get after everything has deflated!  With all of the bubble watchers on CNBC reminding you that things can pop, you have to be a little confused now that all of the bull market parties balloons are dead flat laying all over the floor.

We remain long Gold via the GLD etf, and that asset class had another fantastic week, closing up another +4.1% at $871/oz, outperforming the SP500 by almost 600 basis points. With the Russian Ruble hitting all time lows against the Euro this morning, the Chinese Yuan hitting its lowest price since December 10th, and the greenback feeling the ills of a nasty Hank "the Market Tank" 2008 hangover, gold continues to "re-flate."

Whether you are an exec at Rohm & Haas this morning who is seeing his/her stock price deflate due to the Kuwaitis not having the cash to supply Dow Chemical for the acquisition, or your one of them poor fire engine chasing "activist" people who chased Bill Ackman all the way to "Tar-g-eh"... it's all one and the same. 2008 was a year that everything from the madness of petrodollars to those "Made-up" Madoffs has all deflated. The only thing that gets air back in the tires of global finance is to "re-flate" them. Don't worry about the long term implications - this country hasn't worried about them for decades now. "To be wronged is nothing, unless you continue to remember it."

Best of luck this week.

Re-Flate! - etfs122908