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What do you do, Madame? - asset allocation010809


"As the facts change, I change... what do you do, Sir?"
-John Maynard Keynes

To be clear, I am no Keynesian. However, I think this may be one of the best one-liners in the economic dialogue - it is a process.

I have my investment process, and you have yours - together, we can learn from one another and test, implement, and evolve. That's what the most successful dynamic multi-factor systems on this planet have always done. There is no reason to believe that macro economics will end up any differently. When the Street or your boss tells you they "don't do macro", I humbly suggest you challenge that received wisdom from the heavens of non-transparency, and ask well "what is it that you do, Sir?"

Don't forget that the 1st Nobel Prize in Economics wasn't awarded until 1969 - there are plenty a precedent waiting to be set in this profession; plenty of processes to be tested and tried; and plenty of winning and losing investment strategies that will emerge from the facts.

Of course, this isn't a gender thing, so THE question could very well be "what do you do, Madame?" In fact, neuroscience is starting to uncover The New Reality that women are actually predisposed to make better portfolio decisions than men, on balance, when under stress. Sorry guys!

One of our sharpest female clients jumped right on my suggestion from yesterday's Early Look ("Crisis In Credibility", www.researchedgellc.com, 1/7/09) and effectively peppered me with questions as to the implications. She, as usual, was all over the pin with THE questions she was asking. Given the facts that have revealed themselves over the course of the last 3 months, THE question remains: why doesn't Wall Street understand that there is no longer a "Liquidity Crisis" and that all we have left is a "Crisis in Credibility?"

Whether it be Satyam Computer's Indian fraud announcement that continues to rock Asian equity markets or Chinese computer giant Lenovo trading down -26% last night on missing expectations, it's all one and the same - we have ourselves a crisis in both the credibility of the financial system's leadership and the research process embedded therein. If we didn't, expectations from Madoff to the "Made-Up" wouldn't be creating so much heartache in your 401k's.

"Expectations" are indeed "the root of all heartache", and to be clear, I am not a Shakespearean student in creative writing either, but his point lines up very appropriately with the Keynesian one. When the facts change, you better make moves in your portfolio, or your investors will soon be expressing heartache of their own.

Why does this process gospel according to Keith matter to the market this morning? Well, because it matters every morning. When I started selling our position in Commodities and Equities into the peaks of pessimism caught off sides, I was doing so because the facts in my macro model were changing. I didn't do it to be cute. I didn't do it to pander to a core constituency. I simply did it because I thought I was going to be right.

There are 3 things that have changed in the last 72 hours of global macro fact gathering: 1. Prices, 2. Expectations embedded in those prices, and 3. Timing of macro catalysts.

Of those 3, price and expectations are correlated functions of one another. As prices rose, so did expectations - so I started selling into them. We sold all of our "re-flated" Commodities, all of Brazil, and all of Hong Kong - prices in the two latter equity markets had risen over +40% since we started getting bullish, while the price of oil had raced +46% higher in less than 9 trading days. As prices and expectations change, I change... what do you do, Madame?

When it comes to understanding markets, Madame Speaker, Nancy Pelosi, is not in the same league as my aforementioned client. Yesterday, Pelosi, and Congress at large changed the point #3 in what mattered most to my macro model on the margin - TIMING. I sent out 2 separate intraday macro notes to our top tier Macro clients yesterday titled "Beware of Congress" and "Obama Having a Rougher Day" - so I won't rehash those notes in full, but I will say that the facts were changing yesterday - real time - and markets wait for no one.

The bottom line is that Congress is pushing out the timing of the catalysts associated with Obama's inauguration. On the margin, these pending catalysts are mostly positive... but their duration was being pushed out, at least rhetorically. I actually think this is great for the US stock market in general, because it creates a longer dated tail of positive announcements - in the face of a dreadful pending employment report tomorrow, and Q4 earnings season right around the corner, God knows we need that.

I don't need to be bullish or bearish. Neither do you. We have to be right. This is going to be a dog fight in 2009 as to who has both the best investment processes and returns. We will never, ever give up. We have your back. We appreciate your business and feedback - without it, we wouldn't be aware of as many facts changing in this globally interconnected market place as there are.

My buy/cover range for the SP500 is now 885-900. I proactively cut my asset allocation to US Equities in half over the course of the last week. Now I am open to buy more, lower.

Best of luck out there today.

What do you do, Madame? - etfs010809