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This note was originally published at 8am on September 12, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Any fool can know. The point is to understand.”

-Albert Einstein

After spending some much needed time with my beautiful wife on a non-Greek island in the middle of nowhere last week, I’m feeling good this morning. I’m re-charged and ready to go after some Fiat Fools in France.

Actually, I’m not ready for that. That would be boring. Playing yesterday’s game all over again usually is. Being short European or US Equities is yesterday’s news. Today we are tasked with playing the game that’s in front of us.

Whether yesterday was 2008 in the US or 2011 in Europe is really for history to decide. Crashing market prices are what they are and I highly doubt blowing up other people’s money a second time around is going to be tolerated by at least that one core constituency – those other people. Equity market fund “outflows” and “sentiment” will be the final stage for the 2011 Equities bears to navigate.

Back to the Global Macro Grind

Even for a central planner of modern day money printing, arresting gravity is difficult. With that risk management thought in mind, here are the Top 3 things I am looking at this morning:

  1. GERMANY – the German DAX continues to tell us all we need to know about not being long anything Europe (stocks, bonds, or currency). With the healthiest fiscal situation and balance sheet of a bad Western European bunch, if Germany can’t stop going down, I don’t see why France or Italy can; DAX, CAC, and MIB Index crashes are now -33%, -30%, -39% since the end of April.
  2. EURO/USD – from The Correlation Risk perspective, this remains the most important relationship in all of Global Macro. We like to say, “get the EUR/USD pair right and you’ll get a lot of other things right.” Both the TAIL ($1.39) and TREND ($1.43) for the Euro have broken expeditiously here in September.
  3. SEPTEMBER – after going net short for the 1st time since June 23rd  at the end of August (more SHORTS than LONGS in the Hedgeye Portfolio), we showed the “Month-End Markup” factor (last 6 days of the month vs first 6 in the new month for US Equities). The average 6 day drawdown since April = -4.5%. For September to-date the SP500 is down -5.3%.

Of course, any fool can know most of these things after they have occurred. Yesterday’s score is the score. Since the 2007 and 2011 highs, the SP500 is down -26.3% and -15.3%, respectively. The point now is to understand what to do next.

On today’s down move, this is what I’m going to do:

  1. COVER shorts that have gone down
  2. BUY Asian Equities where the rate cycle is about to become accommodative (no more rate hikes)
  3. BUY US Equities (Utilities and Healthcare first) as we SELL more of our US Fixed Income exposure

Now before I get accused of being all horned up like a bull here, we’re in a very good position to take our time. After all, rotating your assets from one asset class to another should be a proactive process, not an emotional point.

Last week, on US Bond market strength and US Equity market weakness, I sold Fixed Income Exposure (TLT) and started buying some US stock market exposure (XLU and XLV). As a reminder, I moved to ZERO percent US and European Equity exposure before this morning’s episode of the Fiat Fool Monday gong show began.

Here’s the Hedgeye Asset Allocation Model as of Friday’s market close:

  1. CASH = 55% (down from 64% last week and down from 70% at my peak Cash position for 2011)
  2. FIXED INCOME = 18% (US Treasury Flattener, Long-term US Treasuries, and Treasury Bond ETF – FLAT, TLT, and BWX)
  3. INTERNATIONAL EQUITIES = 12% (Philippines, China, and S&P International Dividend ETF- EPHE, CAF, and DWX)
  4. US EQUITIES = 9% (Utilities and Healthcare – XLU and XLV)
  5. COMMODITIES = 6% (Silver and Corn – SLV and CORN)
  6. INTERNATIONAL FX = 0%

Cutting an exposure to ZERO percent can be considered “aggressive” by someone who doesn’t understand what we do. Most recently, I’ve opted to cut my International Currency exposure to ZERO percent. The #1 reason for that has been my being bullish on the US Dollar for the first time in a long time.

With Global Growth Slowing being priced in and Americans leaning more conservatively in the polls than they have in years on both fiscal and monetary policy (Fiat Fools are politicians and, yes, they follow the polls), the US Dollar has put on one heck of a move “off the lows.” Last week alone, the US Dollar Index was +3.3%. That’s very good for Americans.

Yes, Americans. As in the other 90% of Americans who don’t really own stocks anymore. Either by liquidation, capitulation, or californication (housing bust), that’s your New Reality of a financial system that people don’t trust. The top 10% of America’s wealthy own 98.5% of the US stock market (source: G. William Domhoff, UC Santa Cruz). And 10% of America isn’t America.

If I’ve said this 100x in the last 3 years, I’ve said it 1000x – the best path to American prosperity is through a strong US Dollar. This isn’t a political point. Both Reagan and Clinton got this as right in America as Bush II and Obama have had it wrong. Strong Dollar reduces inflation at the pump and creates more spending power in this brave, new, globally-interconnected world.

The Monday morning Fiat Fool quarterbacks of the Keynesian Kingdom don’t get that, yet. But markets have always had a not so funny way of helping them eventually understand.

My immediate-term TRADE ranges of support for Gold, Oil, and the SP500 are now $1844-1903, $85.81-88.09, and 1126-1177, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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