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Politics, Process and People - asset allocation011309

“There’s been a breakdown between the conduct of politics and the people”
-Yoshimi Watanabe, last night…

Japanese Cabinet Minister, Watanabe, walked out on his political position last night and called for the resignation of Japan’s latest token Prime Minister, Taro Aso. Since Koizumi stepped down, Japan basically changes their said “leader” every 9 months, so it wouldn’t surprise me whatsoever if Aso eventually resigns – what does surprise me, however, is this loud and public ‘You Tubing’ of Japan’s long held (and accepted) bureaucratic order. It’s about time – well done Mr. Watanabe, well done!

Japan’s stock market is one that I have asked you to avoid like the bubonic plague for the better part of, well… since I started writing these notes – so I trust that you have. As Marty Whitman would say, “a bargain that remains a bargain… is no bargain.”

Japanese stocks got hammered last night closing the session down -4.8% on decent volume. That was the worst performing market in Asia, and it should be. Japan’s yield curve has been flat for a decade – they have inspired ZERO foreign investment as a result. When you pay out ZERO returns, that’s what you get – the American political machine better not forget that as it locks arms with the beggars of the politico and trudges along the lows of a global socialist bailout program. When there is a “breakdown between the conduct of politics and the people,” the people in America always win. Americans are taking their country back from the bankers right now. Thankfully, this long overdue process is in motion.

All three of the American indices that I called out yesterday broke down and closed below my support levels. Make no mistake, this is bearish. Now those support levels become my resistance levels – unless we can close above them, you are best served to be making sales on up days.

Do I like getting smacked around out there in the marketplace? No. The risk/reward in my macro model’s math played to the bullish side yesterday, and it still does this morning… just from a lower price. As prices change, expectations do. The Obama inauguration catalyst that I have been highlighting, bullishly, for the last month, is what it is – a month into my ranting about it. Could the US market’s +16% rally from its November lows have already discounted the positivity associated with Obama’s new leadership in The New Reality? Maybe – as the math changes, I will.

From yesterday’s close of SP500 870, I see a risk/reward in buying the SPY’s (SP500 etf) at -1% risk for +3% reward. That’s why I bought SPY into the close yesterday in our virtual Portfolio (see www.researchedgellc.com ). Every decision in markets has a time and price. If I allow my mind to be infiltrated with the negative thoughts of giving away a goal, I will never have the clarity needed to get back in the faceoff circle expecting to win the next puck back. That’s just how this game goes – if you let your mistakes eat you up inside, they will.

The following levels of resistance in the SP500, Nasdaq, and Russell 2000 need to be overcome for our “Obamerica” and “MEGA US Consumer Squeeze” rally to continue to make higher 3-month cycle highs and higher lows: SP500 889, Nasdaq 1554, and Russell 477.

If those levels are overcome, and the US emotional index (VIX) can keep a lid on itself under the 54.35 line, the US stock market is going to go up as fast in the next week as it has dropped in the last one. Since I asked you to make sales at 941 SP500 last week, don’t forget the math – the SP500 has effectively dropped -7.5% in a straight line, inspiring the “Great Depression” friends of my bear clawing past to re-populate their mugs all over your local manic media TV channel. Everything has a time and a price. All of the other noise that occurs in between timing and pricing is what it is – revisionist history.

Other than the Pandit Bandit compromising whatever credibility he had left yesterday, what was it that had people run for the global equity exits? I can give you a laundry list of things – surely, this too is revisionist history by virtue of it being yesterday’s news – but here’s what gets the red marker in my notebook this morning:

1.      Asian stock markets have broken short term momentum support

2.      Asian currencies (ex-Japan) are going down in concert

3.      European stock markets broke short term support

4.      Russia came back from their holidays, and devalued both the ruble and the RTSI exchange

5.      Middle Eastern conflict has passed through its apex of Israeli attacks (they need oil to go up, not down)

6.      Brazil had a -5.2% correction yesterday, after seeing a +40% move to the upside

7.      Commodities (CRB) were down -3.9% yesterday, underperforming equities

8.      Oil prices have lost -25% in 6 days

9.      The US Dollar has strengthened from its lows, weakening everything “re-flation”

I’m stopping with 9 contributing factors that I have interpreted as negative. There are plenty more that I will touch on during our daily “Macro” client call at 830AM. I don’t wake up every morning looking for data points to support my “call”. I strap on the accountability pants and call the river cards on the table as they lay. The facts don’t lie, people do… and I for one, am not going to stand up this morning and be proud of losing yesterday.

Today is a new day, and not losing your money remains the objective. Start clean and don’t start selling the lows into the market’s opening weakness. We are one day closer to the Obama catalyst. We have $36/oil, zero percent interest rates, the narrowest TED spread we have had in months, and an arguably a deserved “Bush Bottom” (see yesterday’s intraday Macro post at www.researchedge.com  for that note) as a result of “a breakdown between the conduct of” American politics…  “and the people.”

Best of luck out there today.

Politics, Process and People - etfs011309