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Thanking You - asset allocation123108

“We think it’s a mistake for managers to use gates and other tools to limit investor access to their funds”
-John Paulson (December 2008 Paulson & Co. letter to investors)

In December of 2007, most of those who gave me their attention recall my introduction of a pending investment theme for the hedge fund community (for 2008) called “Redemptions and Litigations.” I lost some so-called “friends” in the business for taking a stand on that front – other than being in the business for 10 years, who was I to question the golden geese?

While most are sending around their revisionist historian year end “review” today, I am locking arms with you, our clients, and moving this ball forward. The aforementioned Paulson quote is, of course, from THE Paulson who was right in 2008. The one who manages $36B, knows how to manage risk in down markets, and knows exactly what to do to his competitors when he sees them making excuses.

“John Paulson blasts hedge fund managers” – that was good enough for the Top 3 on Bloomberg this morning, so it should be good enough to get me out of the dog house of being the antichrist of the “hedgies”. My New Year’s wish has already been fulfilled – not all hedge funds are “hedgies” - thanking you, God!

Looking ahead is always more challenging than looking back. Looking back provides you with lessons to improve your process. Looking forward provides the tremendous opportunities associated with The American Dream – on Wall Street, they call it “making the call.” On Main Street, they call it “getting it right.” On field’s of professional sports, they call it “winning.” That’s my prediction for 2009 – winners and losers will continue to differentiate themselves. There is no such thing as a free lunch anymore. This is not a time to throw up “gates.” It is time for our industry to abide by the client’s expected principles of transparency, accountability, and trust.

We’re all done with the “Investment Banking Inc.”, “Private Equity Mania”, and “Hedgie” calls. We’re all done with that other Paulson, because in t-minus a few days, he’s as gone from this global macro picture as are the three aforementioned fascinations.

We’re looking forward to new leadership. We’re looking forward to risk management. We’re looking forward to seeing The New Reality play itself out.

So what’s “the call" Mr. KM? What do we do in the new year? Well… to borrow one of the greatly overused lines in corporate culture, “those are great questions!”

In The New Reality, however, what we do is do what we have been doing. We get our feet on the floor earlier than the competition, and we grind through the morning’s facts around the globe. As the facts change, we will. That’s pretty much it.

This morning’s positives far outweigh the negatives. This is the developing “Trend” of The New Reality. So on a day when everyone who is travelling is saying “it’s quiet” out there, allow me to submit a list of 9 real-time global facts that juxtapose that narrow conclusion:

  1. The SP500 had its best move in 2 weeks yesterday, putting its “re-flation” to 18.4% from the 2008 panic low of 752

  2. The range of the SP500 continues to narrow as volatility continues to crash; the VIX is at 41.63, down -48.5% from its 2008 panic high

  3. The US market’s breadth continues to expand, yesterday’s advance/decline line was lopsided to the bull side at 79% vs. 19%

  4. The Asian Equity market continues to “re-flate”; Hong Kong closed up another +1.1% overnight, taking its gains to +30.6% since it’s November low

  5. The European Equity market is putting in day 3 of its immediate term squeeze rally; the FTSE is +1.3% - that too is +18% higher from its lows

  6. The Equity markets levered to global “re-flation” (Brazil, Russia, Canada, Australia, etc…) continue to make higher lows

  7. The CRB Commodities Index is stabilizing in the range where we have issued our 1st bullish buying signal in years (CRB 209-219)

  8. The “re-flation” leading indicator correlation (Gold vs. the US$) continues to signal buy Gold (GLD), short UUP (US Dollar etf)

  9. The Reference Rate (3-mth LIBOR) is down again today at 1.44%; breaking down as global market sentiment indicators make higher lows

I usually stop at nine, simply because everyone else issues their “top 10.” Why is consensus 10 instead of 9 anyway? Why does everyone agree to agree that the 200 day moving average is “the line”? Why did we believe in the “golden era” of all that was levered up?

The year-end review, should be about asking THE QUESTIONS that no one has either asked, wants to ask, or in the hallowed halls of the Street’s investment elite is ALLOWED to ask. I have only had 10 years watching this story play itself out, so you don’t have to take it from me… but if John Paulson signs off on this line of thinking, will you take it from him?

I love THE questions; I love THE debate; and I just love THE game. Thank you for putting up with my rants this year. Thank you for letting me express my investment ideas in an unencumbered forum.

Thanking you all for giving my team and me the opportunity to be a part of your investment debate in 2008. We’re looking forward to earning your trust in 2009 and beyond.

Best of luck and health to you, your respective teams, and families for the new year.
Keith R. McCullough

Thanking You - etfs123108