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Destroyers of Capital - asset allocation012109

“If an idiot were to tell you the same story for a year, you would end by believing it.”
-Horace Mann

Herein lies the crisis of confidence that remains with the US stock market. If you want to wake up this morning believing that the market cracked yesterday because of Obama, go right ahead and believe that narrative fallacy – if you just don’t like the man, stand up and blame him – that’s easy enough to do. The reality is that this market is swooning because the Destroyers of Capital are crashing.

I have called this a Crisis of Credibility. I have called Investment Banking Inc. a horse and buggy whip compensation structure. You can call the US Financials Sector (XLF) what you wish. At -36% for the year to date, in a year that is less than 3 weeks old, we can all call this another crash.

Crashes in my models are 3 standard deviation moves within the duration I build into my investment thesis. For others, crashes are simply what happens when they invest alongside professional story tellers – otherwise known as idiots. If that’s a word that’s too hard to read, too bad – Wikipedia says “idiot is a word derived from the Greeks as a person lacking professional skill… in Latin the word “idiota” means uneducated or ignorant person.” In this regard, what would you call Hank Paulson?

The best news this morning is that Hank Paulson, Chris Cox, and hopefully Vikram Pandit are going away. In any other high paying profession – say medical practice – the professional lack of skill of these said economic savants would have them barred. The revisionist historians are pretty good at understanding how Donald Rumsfeld’s ignorance and hubris led is to where we ended up in Iraq – it will not take them very long to lay the accountability cards face up on the purveyors of capital destruction. Hank Paulson and Investment Banking Inc, tag – you’re it.

With the SP500 down a third of what the US Financials are, that still puts them down by a lot for 2009 to date. Yesterday’s -5.3% move came on better than average volume and a breakout in volatility (as measured by the VIX Index). While SP500 805 is still +7% from its November lows, the bear claws have every right to be swiping at anyone who calls themselves bullish – for that, I’d say that in the USA, China, and Gold at least, since late November I am accountable for what I have been saying. In those respective asset classes, I have been bullish, but at very specific prices.

One fund that mimics my daily entry/exit points had me up close to +9% in December, and now down close to -2% for January to date. I will make no excuses for being down for 2009 to date. I get up every morning and do my best to “make the call” – when I lose people money, it’s my fault, not the market’s. My current Asset Allocations model has a 64% position in Cash and a 6% position in Gold.

The Destroyers of Capital have perpetuated a compromised view by taking tax payer moneys and blowing it up in smoke. Whether you call Pandit cutting Citigroup’s dividend to a penny this morning embarrassing, or just more of the same versus expectations is not the point. The point is that these people continue to pay themselves massive compensation structures to not only be un-transparent, but to be un-accountable. Who in their right mind is ever going to trust these people ever again?

The Chinese certainly don’t – a few weeks back, Destroyer of Capital BAC, sold their equity in Chinese banks in their face. When men are desperate, they sell what they can, not what they should. This compromise of the American bankers system’s handshake, sadly, will have long term repercussions. I pray that the Chinese don’t start unloading US Treasuries en masse. Blowing up the last bubble market that remains (Treasury Bonds) might even make me depressed.

This morning you are going to hear the pundit patrol jump on their meme machines and start telling you that the answer is to “nationalize the banks.” Well, that sounds interesting, but take a visit to the Russian stock market, or the Irish one for that matter, and let me know how that goes. Whether you are nationalizing your natural resource enterprises (Russia) or your banks (Ireland), you are the only market’s going down as fast as the US Financials right now. CNBC better be careful what their crackberry entertainers wish for.

Russia broke its October lows yesterday and hasn’t looked back. Trading down another -1% this morning at 509, the Russian Trading System has lost -25% of its value since Christmas, and now even on up days for oil (oil shot up to $41/barrel this morning), the market has NO confidence all over the offer. In Ireland, they moved to nationalize the banking system last week, and inclusive of this morning’s -3.6% drop, you have an Irish stock market that’s lost almost -20% of its value in the last week alone. Them be crashes folks. The Destroyers of Capital are now wrecks on this interconnected global market’s shore.

Brazilian stocks broke my quantitative levels of support intraday yesterday, so I sold them. Managing risk is more about taking small losses before they become large ones than anything else. That’s just a process that I have had to learn the hard way. All of those who did not respect capital, especially your capital, are still in the process of being educated on this front. Illiquidity and leverage are the weapons of mass destruction that Hank Paulson never understood.

China is literally the only major economy in the world that has a stock market that is healthy across my quantitative factors. China closed down, barely, last night taking the Shanghai Index to 1985. There is formidable support at the 1948 line on that index, and there should be. These communists turned hybrid capitalists are the only allocators of capital who own the liquidity associated with a healthy balance sheet…

“Lacking professional skill” or being “ignorant” are no longer acceptable in The New Reality. Be accountable. Be transparent. Have a handshake that people can trust – the “idiots” and Destroyers of Capital are finally being handed their walking papers. For that, we should all be thankful.

Best of luck out there today,
KM

Destroyers of Capital - etfs012109