"How much can you know about yourself if you've never been in a fight?"
-Brad Pitt, Fight Club
One of our rising young analysts here at Research Edge who is also a martial artist, Christian Drake, reminded me of an important lesson that I had to learn the hard way in life. That lesson came while I was playing junior hockey 15 hours away from home at the age of 16 against men 3-4 years older than I in an ice cold barn - when he dropped the gloves, I had nowhere to hide. Now my front teeth are fake.
Losing a fight in the wake of a disciplined and repeatable process is largely forgivable. Pitiful performance stemming from fiduciary malfeasance and laziness is not. The last year has certainly been a financial fight. What have you learned about yourself? Perhaps more importantly, what have you done about it? Initiative and innovation are born of self-reflection... self-awareness... accountability...
At this stage of the fight, I am hardly going to hide from the fact that I am just starting to "make the call" to be Long America. One down day in the market doesn't a loser make. Those seats are reserved for those who were bullish 50% higher in the SP500 from yesterday's close.
Fifty percent - yes, for you history fans out there, you know that's a huge number! And yes, markets are both leading indicators and discounting mechanisms of everything that you see the manic media flashing you today. The US market has been signaling the malfeasance of Madoff to the Texan who was knighted in Antigua for almost 16 months now. And Guess what? There are plenty more cockroaches where those ones came from. The good news is that, finally, we're going to smoke them out of their holes. Boys, it's time to drop the gloves.
As of yesterday's close, the SP500 is down -13.8% for 2009 to-date. That's also a big number! So don't wake up to this note feeling like now is the time to get bearish. I hope we have been proactively preparing you for this for well over 12 months now. Success in the arena of life is most obviously won when proactive preparation meets obvious opportunity.
I won't hammer on the 6 reasons that I issued in yesterday's missive as to why this morning is different than those mornings in and around November 20th. Overnight, the herd's emotions may have changed, but those 6 macro factors haven't.
Some "economists" and spectators of this full contact sport still think that markets move on "rational expectations" - I don't. I'm more of a meat and potatoes Darwin kind of a guy. When a 230lb Albertan defensemen loses a few screws out there on the ice, you take one look into his eyes and realize what the real world practitioner better figure out about the definition of "rational."
Darwin's theories support what I think the horse and buggy whip US Financials, and anyone who needs leverage to run their business are going through right now - "the struggle for existence." At the end of the day, seeing the XLF (S&P Financials ETF) down another -5% yesterday, and down -40% for 2009 to-date, is a clean cut reminder that the New Reality is here. This isn't new this morning folks - this is an ole school brawl and the rules of mark to market are reigning supreme on these stock prices and their shareholders alike. Being willfully blind doesn't work when you are in a fight.
If you want to straight line this newfound consensus that companies and their market caps can lose their teeth across the entire globe of trade, you can go and do that... but at these prices in the US market I dare say making short sales on that being a unique investment idea is borderline reckless. Some people call this "meme theory" (humans innately want to mimic the behavior of the crowd), and others call this the "herd mentality", which is pretty much aligned with the same inspiration that people in this business generally have to cling to consensus rather than drop the gloves and fight the crowd when the timing is right.
On yesterday's gap up open for the US stock market I made some sales. You can call that "over-trading" - I call it fighting for survival. There is a very relevant mathematical difference between yesterday's intraday test of 800 in the SP500 versus it's smack down 778 close. If you have a proactive process that allows you to play both defense and offense in this market, use it.
From here, I see 2% downside in the SP500 and +6% up. That's BUY/COVER the 761 line and SELL/SHORT the 823 line. As one of my old junior coaches used to tell me "Backcheck, Forecheck - Paycheck." The next bull market does not cometh - this is a market that needs to be traded.
In terms of Asset Allocation, some of those profitable sales resulted in taking my position in Cash back up to 64%. I sold out of our long position in China for a gain, and that leaves our exposure to International Equities at 6% (all in Brazil). I have an 18% position in US Equities, and I will double that exposure, at a price. Why? Well, primarily because I can. Not using leverage has it's perks. So does having the liquidity associated with a large cash position and owning my own duration.
Who owns your duration? I hope it's not some fly by night Swissy Fund of Fund... or God forbid an investment banking CEO who is about to be shot out back behind that barn of the horse and buggy whip...
After a fifty percent throttling by that big burly defensemen called Mr. Market, what have you learned about yourself? Perhaps more importantly, what have you done about it?
Darwin said you better evolve, or you will go away. It's time to drop the gloves - I'm not letting my small part of this country turn into Japan. You can bet your Madoff on that.
Have a great weekend.