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Crisis In Credibility - asset allocation010709

“Success is how high you bounce when you hit bottom”
-George Smith Patton

In yesterday’s note we talked about Chinese Generals leading Asian stock market’s out of “hitting their bottom”, so it’s only fitting that we go back to the history books and cite one of America’s finest Generals in order to give our morning call some geopolitical balance.

Despite the massive performance “bounces” that we have seen in both commodities and global equities since that November “bottom”, a global crisis in credibility continues to manifest. In the end, calling all of the cockroaches onto the mat will be a good thing… but in between now and then there will be plenty of daily trading issues investors have to face in making these people accountable.

This morning, the “Made-up” Madoff crisis in credibility has gone global. The Romanian stock market is getting tatoo’d this morning, trading down -12%, after Banca Transylvania was cut in half. Meanwhile India’s stock market got smoked for a -7.3% down day after Satyam Computer’s CEO confessed that he has been “falsifying accounts” – Satyam, which ironically means “truth” in Sanskrit, was down -69% on the news of this fraud.

Whether they be Romanian bankers, the said “Warren Buffett’s” of India, or your local American ponzi schemer, these are all outputs of the same governing secular trend in the world of finance. The said savants of “making money” are being ‘You Tubed’, one by one. In the end, there is nowhere to hide anymore. The game of global finance’s rules are changing. Be transparent and accountable to your investment process, or get out of the way.

In the USA we are seeing the “wanna be” short sellers move themselves out of the way, just as expeditiously as those who levered their brains out on the long side did for us over the course of 2008. This “Trend” of amplifying the performance issues associated with investing alongside consensus is as an important one as ridding ourselves of CEO’s, bankers, and money managers who have no credibility. After all, investing in The New Reality is going to be Darwinian – as it should be.

At yesterday’s close of 934, the SP500 has “re-flated” the shorts’ books for a +24% move off of the lows. You can be harder on those US equity short sellers than those who sold short CRB Commodities Index at the bottom a few weeks back – those guys have only had to deal with a +16% “re-flation”… as for the short sellers of our “buy oil” call, well, that percentage move would be too “mean” for me to print.

The reality is that the bears continued to signal the apocalypse cometh while the bulls were too bearish.  That sentiment shift is finally changing however, and we need to call that out this morning for what it is – a fact. This week’s II Bullish to Bearish survey has flashed a positive delta of +3 for the Bulls over the Bears. After a +24% move in US equities and greater than +40% moves in Brazil and Hong Kong, is that a surprise? Absolutely not – this is what the consensus crew does – they chase the performance leaders. To put this +3 delta in perspective, less than 2 months ago, we were signaling a “bottom” in sentiment when the Bears in this survey outpaced the Bulls by a -27 point delta!

I am not a Keynesian, but I do like some of his one liners – “as the facts change”, I do. As sentiment continues to shift to our side of the bullish immediate term “Trade” call on global equities and commodities, I’ll start to walk away. Will I start to sell too early? Of course – that’s what I am really good at – making calls and never seeing the last tick of upside!

So now that I have sold all of the commodity exposure in our Asset Allocation model, and have pared back my exposure to US and International Equities, what are the important levels of support where I come back and buy stocks and commodities on weakness?

In terms of US Equities, there is considerable support that has built itself at the following levels in the following indices: SP500 885, Nasdaq 1538, and Russell 472; on the International Equities front, meaningful support for Hong Kong and Brazil resides at 14,569 and 39,875 on the Hang Seng and Bovespa, respectively; and in commodities land I like buying back the CRB Index, Oil, Gold, and Copper at these prices: $224, $44.73/barrel, $828/oz, and $1.44/lb.

These quant levels in my models used to be resistance – now they are support. If support lines break, it’s bearish, and I will change my immediate term “Trade” point of view alongside those prices.

My name is Keith McCullough and I support this message of transparency and accountability. George Patton’s “bottoms” are processes, not points. Don’t buy into immediate term tops. Don’t sell panic lows. Be patient, and be your own process.

Best of luck out there moving this world forward,
KM

Crisis In Credibility - etfs010709