Hope and Hypocrisy - asset allocation012009

“Lead, follow or get out of the way!”
George S. Patton

Basically, that’s what I hope Obama gets up and says to the run-of-the-mill market pundit who works for a firm that has no credibility, yet hypocritically questions Obama’s leadership credentials. “Hi, I don’t like Democrats, they aren’t capitalists… but my firm contributes massively to the Democratic party, and my boss asks for bailout money every other day.” Unfortunately, depending on who you are, neither hope nor hypocrisy are investment processes.

Today, of course, is the long awaited Inauguration Day of America’s 44th President. Was the day trader’s Obama rally into the close on Friday? Was it the +5% move in the 5 hours of trading from last Thursday at noon until Friday’s opening SP500 prints at 857? Was it the 6 week +25% rally in the SP500 that ran out of gas on January the 5th? Or is it the +13% cumulative gain we have already baked into the SP500 cake at last week’s 850 close?

Was it none of the above? Do we wait on specific calendar dates that the entire world is staring at on the day of? Or do we have a process that bobs and weaves using prices versus expectations? I don’t know what other people do, but you know where I stand on this. Every day, the math changes alongside both the facts and fictions that the global marketplace offers us. This morning is the first time in a very long time that my math says there is an equally weighted risk/reward setup for the SP500’s price, in the immediate term. I see downside risk to 818, and upside reward to 885. Trade that range.

While the intermediate “Trend” of volatility breaking down as the US market continues to make higher lows remains, that certainly doesn’t mean that the bulls can’t spend a day, week, or month getting water-boarded in a dunk tank. As sure as the sun will rise in the East this morning, you know the bulls who turned bearish in November are still being force fed the apocalypse cometh narrative from the likes of Nouriel Roubini and Jimmy “The Bowtie Cat” Rodgers – this is what these guys do – they are alarmists. They scare people who don’t have a macro process.

Can the perpetual bulls be more bearish than the long standing bears? I really have no idea. While Roubini’s process is an impressively academic one, supported with plenty of history and math, some of these talking heads on the entertainment networks clearly operate using a one factor model – emotion. If they tape goes up, they press play on the bullish narrative fallacy. If the tape goes down, they say “I’m not an economist”, blame the market, and rarely feel shame.

Overseas, the Russians and all those levered to the almighty “petro-dollars” are feeling a whole lot more than shame – they are feeling the pain! Russia’s stock market, which was flashing negative divergences in our model for all of last week, finally crashed again, breaking its October 24th low of 549. The Russian Trading system Index is currently lagging all of European trading, dropping another -3% to 515, taking it -6% below its prior low, and putting its cumulative crash since Christmas at -24%. Yes, the word to describe this is crash.

Crashes happen when what people hope doesn’t happen, happens. It was only 9-12 months ago that I would write about the geopolitical risks associated with “Putin Power” – now those days of his political hubris are gone, but that doesn’t mean that he won’t behave like a man in desperation can behave. As we have seen in Gaza, there are unintended consequences to the realities associated with a crashing oil price. Crash? Yes, at $33/barrel this morning, oil has crashed, losing -78% of its value in 6 months!

Middle Eastern stock markets in Saudi Arabia and Qatar are getting smoked this morning, trading down -4.2% and -6.1%, respectively. Yes this is bad, for some. It will be interesting to see if Maria Bartiromo gets another one of those “exclusive” interviews today with Saudi Prince of Citigroup, and best buds of the Pandit Bandit himself, Prince Alalweed. Remember his interview with CNBC a few months back when he had the campfire and camels in the background? That was embarrassing.

So was my call to short the US Dollar two weeks ago “with impunity.” The US Dollar reminded us all last week that when there is a Crisis of Credibility spreading across the globe, that cash can indeed remain king. The US$ Index and the VIX (volatility) Index outperformed nearly everything other than China last week, closing up +2% and +8%, respectively. In the face of the US government trying their darndest to de-value the US Dollar, it seems that the Japanese, Russians, Canadians, and Asians from India to South Korea are one upping them!

The South Korean Won is down almost -9% already for 2009 to date, and the year is only 2 weeks old! Last year the Won got hammered, losing -26% of its value as their new US trained head of state tried the Greenspan thing, and got clobbered by the oncoming train called macro-economic cycles. The Maestro you see, didn’t do Macro – he did the Politico! We need to re-train these politicized financial neophytes.

With the exception of China, I am effectively net short Asia right now, and this hedged position is paying off nicely so far in 2009. Overnight, South Korea and India closed down another -2.4% and -2.5% respectively underperforming the other Asian country I am short (Japan) by the hair of their chinny chin chin (we are short EWY, IFN, and EWJ – see our virtual portfolio at www.researchedgellc.com <http://www.researchedgellc.com> ). These countries are not China, and now they are decoupling versus China. The next person who has it in them to remind us of their “Chindia” thesis of yesteryear gets a Research Edge fleece.

Despite reporting their first drop in their employment rate since 2003, the Chinese stock market reminded us all last night that they are moving forward with their own organic growth plans. Stocks trade on the future, not the past. Despite broad based weakness in Asian stock and currency markets overnight, the Shanghai Stock Exchange close up another +0.37%, taking its cumulative gain since the new year to +9%. Make no mistake, from a quantitative perspective, any close above the 1951 line on the Shanghai Index is a bullish breakout.

Amidst the hope of many Americans today, there will be plenty of hypocrites dancing on hot coals. Once the drama of Obama passes this afternoon, we’ll all be facing the realities associated with The New Reality. While the apex of the liquidity crisis has passed, a very relevant credibility crisis remains – and there will be no quick fix. The only solution will be to “lead, follow… or get out of the way.”

Best of luck out there this week,

Hope and Hypocrisy - etfs012009