RUST - asset allocation012309

“Iron rusts from disuse, stagnate water loses its purity and in cold weather becomes frozen, even so does inaction sap the vigor of the mind”
-Leonardo da Vinci
One thing Research Edge can’t be accused of is inaction or playing it safe.  In the midst of a consumer recession, a financial depression and the worst market in a lifetime, we set out to build a new financial services firm.  Our version of the “New Reality” financial services firm puts our clients first, without them, we have no business. 
Every day of the week we are making calls, and in some cases they are “bold” calls – a client’s description not mine!  We believe the only safe thing to do is to take the shots that need to be taken.  Play it safe and you will stagnate.  I was taught early on that taking calculated risks is the essence of hard work.  In 2009, this is the difference between working for you and working for the government.
While many of the same Wall Street traditions still live on, it’s just not the same.  Surprisingly, I learned last night that there is still way too much research capacity on the street.  Darden Restaurants is a $3.7 billion company with 19 publishing analysts and 9 firms attending the annual analyst meeting that don’t cover the company. My guess is that a majority of the people on “the street” attending this conference are less focused on the business of making clients money, and are more focused on whether their employer is solvent or not. 
As far as I’m concerned, the largest US financial services firms have already been nationalized and now it is just a matter of a formality.  The debate over the status of some of the financial services firms reminds me of last year’s debate over whether GM is bankrupt or not!  Of course it was bankrupt, and yes, the government is running our largest financial institutions.  If we can get past this, we can focus on the “new normal” state of the economy and consumer spending. This implies that the market can focus on the facts and not speculate about what could happen.  Yes, some of the facts about the economy are ugly, but looking beneath the surface there are some real signs of life. 
As I thought about the firms attending the Darden analyst dinner last night, I realized that none of their firms allow their clients listen to their morning meetings, which is the cornerstone of our Tier 1 Macro product.  In addition, every day the market is open the collective analysts at Research Edge can give you two dozen things to think about, and we only have six publishing analysts. 
Shortly, I will be publishing our S&P 500 sector view which comments on the trends in the S&P 500 and the nine major sectors.  As we look at the S&P 500 today, it’s quantitatively broken in terms of both the “Trade” and the “Trend”. The financials are the only sector to have broken the November 2008 lows, as reality has set in.  Healthcare and utilities look the best, with the XLV (Healthcare Sector etf) having a great day yesterday.  The “re-flation” trade and the aspirational consumer are sitting on the sidelines – think wants versus needs.  Excluding Apple, nearly every technology company is a closet “industrial” company, and most are seeing cyclical weakness.  See the RE Macro Sector view PDF for more details. 
Relative to our constructive commentary on the consumer discretionary sector we were hit with a body blow as the economic backdrop remains ugly, which was highlighted by the initial jobless claims rising by 62,000 to 589,000 in the week-ended January 17th, matching a 26-year high!  This makes the “E” in “M E G A” a little harder to swallow.  We will see what next week brings.  As the facts change, so do we.
Function in disaster and finish in style!
Howard Penney

RUST - etfs012309