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One on Ones - asset allocation011509

“It is a capital mistake to theorize before one has data. Insensibly one begins to twist fact to suit theories, instead of theories to suit facts.”
-Sherlock Holmes

For those of you who have not had the “privilege” of sitting across the table from one of America’s corporate executives in a Wall Street organized “one on one”, you aren’t missing anything. Although “access” to these “one on ones” are effectively one of the few things that the Street still overcharges the investment community for, like most of the wares that the sell side shops them, they eventually become overvalued.

The sell side’s job, after all, is to sell you stuff. The promise of “one on ones”, I think, is to break the barrier of Regulation FD, and really cozy up to what the CEO or CFO of a public company’s body language looks like. These are helpful, particularly if you fancy yourself as the Sherlock Holmes of the investment business. Make no mistake, most of us who were overcompensated in this business over the last decade actually did think, at some point, that we were worth every penny of our “expert” interrogation tactics… but at what point in the last 6-9 months did investors with this vaunted “access” realize that they were overpaying for a company exec to give them erroneous macroeconomic outlooks? At what point did all the “smart” money in the room start acting on facts that were based on false premises?

As my partner, Tom Tobin, who runs our Healthcare team likes to say, “Wall Street is mostly about storytelling”… and at the end of the day, that’s the truth. People are always “twisting fact to suit theories”, and/or their books. Consider this contrasting narrative fallacy: A) at this time last year the likes of Dick Fuld and Jaime Dimon started to talk about the “worst being behind us” versus B) this week’s Wall Street conferences from New York to California where my team is enlightening me with the following corporate executive outlook – “the worst of the economic crisis is to come.” You seriously cannot make this stuff up.

It “is a capital mistake to theorize before one has data.” If there is one lesson I continuously have to relearn in this business – that’s it. Every mistake that I make in terms of an entry or exit price in an investment can always be traced back to either 1) not maintaining the discipline of data dependence or 2) depending on someone who has bad data! Capital markets and the prices born out of them don’t lie, people do. So be very careful in believing everything you hear in those “one on ones.”

I had a “one on one” with my alarm clock this morning and then went through the Asian data. It was terrible. Japanese machine orders tanked to the lowest level recorded, well… since they started keeping records in 1987. At down -16%, that is one more piece of toxic backward looking macro data. On the forward looking front, Japanese stock prices got hammered again for another -4.9% down move. Yes, stocks are leading indicators, and those facts have deteriorated in Asia from the day that the Crisis of Credibility went global in India with Satyam Computer’s multi-billion dollar fraud.

Frauds are problematic for those investing based on what said “authority” is telling them is going on with their business. Is there corruption, crime, and crisis to consider in Asian equities? You bet your Madoff there is! We continue to be short South Korea via the EWY exchange traded fund – I’d love to have a “one on one” with one of them 2007 “its global this time” bullish investors and hear their views on how trustworthy those South Korean numbers are. The KOSPI index got crushed last night, adding to Asia’s bearish immediate term momentum, closing down -6%.

Despite Thailand cutting interest rates by 75 basis points yesterday, and injecting 116B in Thai Baht of a stimulus package overnight, stocks in Thailand closed down another -3%. India’s stock market, which we continue to be short via the IFN etf, continues to act horribly. It closed down another -3.5%. Don’t forget that “being long India” was one of Vikram Pandit’s “best ideas” before his hedge fund, Old Lane, blew up. God help us all if he was building that investment thesis on the back of “one on ones” with CEOs like that of Satyam Computer.

Frauds and plunging stock markets aren’t good, so don’t expect me to wake up to this data and tell you that it is. Neither are crashing currencies. The Russian Ruble was devalued again by their government this week – now its lost -27% of its value since oil prices peaked last summer. The Russian stock market is starting to collapse again. It is flashing a negative divergence versus the rest of Europe as we await the ECB’s decision, trading down another -3.2%. The RTSI Index is now only 4% away from its 2008 capitulation low – this is the first of the large economy stock markets to test making lower lows. Keep it front center on your risk management screens.

Managing risk is what I do. That’s why I am still carrying a 54% position in Cash in our Asset Allocation Model. When the global data gets this bad, you want to have some powder dry. Part of managing risk, is not getting short squeezed -  a lot of people don’t get that. The levered long community is still busy trying figure out to not be perpetually net long, never mind attempt to understand a proactive process by which they don’t sell the freak-out lows and buy the euphoric highs.

With all that is going on globally, and the lack of transparency implied with foreign stock markets having a Crisis in Credibility of their own, I think the best risk management move you can make right now is to buy American. As always, be very patient on price. I put up a note on the portal yesterday issuing a downside support level for the SP500 at 836. At that level or below it, at least start covering your short positions. If the US market makes lower lows coming out of the Obama inauguration next week, I’ll be the first to admit that I started buying too early. Until then, I am data dependent.

Best of luck out there today,

One on Ones - etfs011409