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Buying Adversity, At A Price - asset allocation010908

“Nearly all men can stand adversity, but if you want to test a man's character, give him power.”
~ Abraham Lincoln

When reflecting, Barack Obama often cites Lincoln… and for that… we should all be thankful. Having a President who actually pauses before something comes out of his mouth, who is both proactive and patient with his words, is a welcomed leadership change that we can invest in.

Whether you are a Democrat, Republican, or neither, I don’t think your political affiliation will do a darn thing for you in trying to earn a return in The New Reality. What you will need is the ability to stand tall in the face of the market’s adversity and ask yourself the tough questions when it’s the toughest time to ask them.

From the very beginning, Obama has been doubted. So don’t doubt for one second that expectations for him to over-deliver versus the levity of his rhetoric will continue to face adversity into his Presidential Inauguration. Being long Obama’s principles has been THE winning “Trade” that has trumped consensus politics for the last nine weeks. Since November, every time this man’s character has been tested by the US stock market’s Crisis In Credibility, the fact of the matter is that the SP500 has made higher lows. Credibility starts with this man’s word potentially meaning something.

Yesterday’s market action was no different. The SP500’s early morning lows were laced with the fear and adversity associated with a consensus that Obama can’t fix this country’s problems today. Now that everyone who didn’t have it in themselves to ask THE question as to where unemployment and savings rates in this country could go at this time last year considers themselves professional “Great Depression” analysts, once again that groupthink is facing the tremendous adversity associated with the madness of crowds. They are myopically anchored on yesterday. They are structurally blind in seeing the potential of the opportunities associated with tomorrow.

This is mainly why I have been hammering home the patience point – be patient on price. Yes, after the SP500 ran up to 941 at 3PM on Tuesday it was overbought. Yes, when the SP500 was on its intraday lows of 897 at 10AM yesterday it was oversold. Buying into adversity is all about expectations, prices, and timing. If you don’t have a process to monitor these critical factors surgically, use ours.

The math here is what it is. At 941 SP500, we had already run a truck through the short selling “ideas” of the US Consumer “Depressionistas.” Since the November 20th panic lows of 752, we had ourselves +25.1% price “re-flation” to sell into. At yesterday’s intraday low, you had a 48 hour sale of -4.7% to buy into. Everything has a time and price.

While the manic media is painting the apocalypse ahead of this morning’s widely anticipated unemployment number, please consider timing. On Monday, that unemployment print will be a historical event, and the short sellers of higher lows will be forced to consider Tuesday January 20th, 2009. Will the SP500 breakout to 1000? No, that’s not my call. My call is that it could very well make higher highs than 941 and test 954. The math implied at the 954 line is +5% from yesterday’s close and +27% from the November lows – that’s math that investors chasing relative or absolute performance cannot afford to miss.

Does managing this US market like a doctor would her patient in the operating room require precision “Trading”? You bet your Madoff it does – the “long term” investor calls it whatever they call it – I call it risk management.

The best risk managers in this business, and in life for that matter, always consider “improbable” events, and manage their decision making in consideration of what no one thinks can happen. This morning, everyone and their brother thinks they’ll see the 7% unemployment rate that we called for 6, 9, and 12 months ago – what if it’s 8%? – I don’t think it will be, but what if it is? What if its 6%?

The point here is that you better have a plan for both 8% and 6%, because the crowd expects 7%. My plan is simply this: No matter what that number is, if the SP500 holds my buying range of 885-900, and the VIX (Volatility Index) keeps its head under $50.21, I COVER, and I BUY.

Yesterday I saw those prices, and went shopping, taking my asset allocation model in US Equities back up to 18% versus the 9% position I had sold that exposure down to by the time my Wednesday morning Early Note went to print at the Transparency/Accountability press.

I have started to buy my position in Commodities back. As usual, I started with a conservative 3% position in Gold – call me boring; I’m cool with that. After markets get squeezed like this one has, at the top of intermediate market moves I am an incremental buyer of low beta and a short seller of high beta.

The highest beta “Trade” you can make into any US market weakness this morning is short-selling weakness ahead of Obama’s January 20th date. In the face of that adversity, provided that my prices hold, I’ll be buying everything that my old friends in the bear camp have on the offer.

Have a great weekend,

Buying Adversity, At A Price - etfs010909