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“Be not the slave of your own past.”
-Ralph Waldo Emerson

My favorite movie of this past year was The Wrestler. I think, mostly, because I was empathizing with Randy “The Ram” Robinson’s (Mickey Rourke) daily struggle. No, I don’t mean the dope and the vices – I mean the wrestling. Getting up every morning to write this note has its challenges, particularly on days after I get pile driven. At the end of the day, I have to find a way to shake it off, slap my elbows, and get myself back in the ring.

I used to be an athlete. Now I’m a risk manager. It’s taken me a decade to come to appreciate that the physical preparation and mental discipline required to win in both of these arenas is very similar. No matter what happens to me out there in the market place on the day prior, come 4AM the next day, there I am.

I am accountable to my teammates, clients, and myself for the call that I have been making that the SP500 wouldn’t make a lower low versus the one locked in on November 20th, 2008. Yesterday, the SP500 got rammed into the mat for a -3.5% down day, closing at 743, which is -1.1% versus where I thought it could go. Instead of making excuses or pointing fingers, the best thing to do here is wipe the blood off my lip, get up off the mat, and get ready for today.

My wife, Laura, didn’t put me in a sleeper hold – so I didn’t sleep much last night – I don’t know how anyone who is serving as a fiduciary in this financial system does on a night after a big loss. In our Asset Allocation Portfolio, I had my team down -0.73% on the day yesterday. For me, having not lost money all of last year, this was a very bad day. For the 2009 to-date, this puts my real time performance at down -3.16%. That’s a net number, and I am not proud of it.

For the year to-date, the SP500 is now down -17.7%, and has dropped over -52% off the top ropes of that 2007 WrestleMania peak. If I woke up every morning trying to outperform on a relative basis, some in this business would consider having positive absolute performance over this 16 month span acceptable. And that’s fine – but my goal is to put up a positive absolute number in our Asset Allocation Portfolio in 2009. I’ll let everyone else worry about what their goals are. I have 10 full months left – and this cage match with the bear that I am currently in is far from over.

I am now long America via the SPYs and QQQQs (SP500 and Nasdaq). For transparency purposes, I am losing -3.98% on that SPY position, and I am up +0.11% in the QQQQs. I hadn’t bought the Nasdaq until yesterday, so my timing was better than bad there.

In terms of Asset Allocation, I moved from 58% Cash yesterday down to 56%. When I am wrong on a US market call, I don’t buy everything all the way down – I wait. That’s not my religion, that’s my process. I buy things in 3s, giving myself some breathing room so that I can buy things when the bear thinks I am dead. Pretending you are down for the count has its competitive advantages, ask Randy the Ram.

This takes my Asset Allocation in US Equities to 29%. The max exposure I will take to an asset class is 33%, so I still have some pop left to powder this bear with. Since I have been the bear, I know a thing or two about beating one on price.

Everything in markets has a price. At its 743 close, I see less than 1% downside in the SP500 in the immediate term (my downside target is 737), and +7.5% upside to the 799 line. In terms of the Nasdaq, anything below 1381 (6 points from yesterday’s close) moves us into the land of a 3 standard deviation move on the short term duration model that I use. Unless I have fundamental research telling me to do otherwise, I buy or cover on 3 standard deviation moves, always.

I sold our long position in China via the Morgan Stanley closed end China fund (CAF) yesterday. This dropkicks my exposure to International Equities to just under 6%, and I have it all in Brazil (EWZ). When I sold it, China was +26.6% for 2009 to-date. Last night, stocks in Shanghai gave back some of their Ric Flair (WWF Wrestler), closing down -4.6%. Now China is +20.9% for the year to-date, and my process doesn’t have any rules that say you can’t buy something back that you sell.

As I watched Asia trade last night, I was reminded that I do not live there. This has an implication, of course… and that’s quite simply that when your trainer/boss throws in the white towel and you have to stop trading, the last thing a portfolio manager in this business is allowed to do is be levered up long where he doesn’t sleep. People who call themselves “risk managers” in this business call this “taking down your book” – I call it selling what you can, rather than what you should.

Understanding how this dynamic works, I try to take advantage of it. After selling China, I am now effectively naked short Asia via short positions in Hong Kong, India, South Korea. Slum Dog Millionaire didn’t win the Indian stock market any awards last night – the BSE Sensex Index hit a fresh 3 month low, and now the country’s credit rating is being put on “watch.” I have been “watching” this country very closely on the short side for the better part of the last year – guess what Mr. Credit Watcher, it’s bad!

The South Korean won hit new lows last night and continues to be the worst performing wrestler in the Asia Federation of anything called a currency. At down -17% for the year to-date, South Korea’s overly ambitious leader is on the tape this morning calling his new reactive strategy “Emergency Economic Crisis Rescue Mode.” That sounds like one of them “claw moves” from the WWF’s Baron Von Raschke – those too, are bad!

Von Raschke was an American wrestler from Omaha, Nebraska, but he was billed from the “Republic of Germany”…. This morning, no matter where you are from, or what kind of style of wrestler/investor you say you are, my advice is this: be transparent, and be accountable. Win or lose, you are, above all else, a fiduciary of other people’s money.

Best of luck out there today,
KM

The Wrestler - etfs022409