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Bear Hunting

Our senior research sector heads are increasingly convinced that genuine bottoms up Research Edge lies in asking “The Question” – who is first to step away from the Street’s pervasive groupthink? Who asks THE critical question first? My macro question at our morning meeting on Monday was “who is more afraid right now, the Bears, or the Bulls”?

Alpha is generated if you ask the best questions first. Importantly, you can shorten the duration in maximizing that holy grail of alpha the faster you find conviction in THE answers to those questions. My answer to the aforementioned question is that today is much like May, the Bears are NOT Bearish Enough.

Anyone who has studied bears (or lived in Northern Ontario with them in your back yard) knows that they have very short attention spans. As a species, they are very comparable to “momentum” oriented hedge fund traders. Bears can hear things from distances as far as a mile away. They have as Wikipedia appropriately points out, “elusiveness and sharp senses”. Humans are generally as scared of them as bears are from themselves. This is exactly how I feel about the US and Global Stock markets right now. No one trusts anyone and, on up days, the bears are faster covering than the bulls are buying. All the while, save the survival of the fittest, funds managed for weekly and monthly returns are being hunted down, and shot.

Other than using guns, across the ages there have been many other ways that we have hunted bear – knifing, snaring, calling - not all of these strategies are incredibly effective, particularly when everyone is running around yelling at each other. Predictably, as we are seeing in today’s market, politicians have always offered up some ingenious tactics. The most famous might be Teddy Roosevelt’s book titled “Hunting the Grisly”, where Wikipedia again notes that Teddy thought “small terriers could be used against bears, they usually only worked against bears which had never had the experience of being hunted before…the terriers would irritate and distract the bear with their yapping.” Sound familiar?

As of last night, the Democrats official released their US market hounds. Everyone from the self proclaimed savior of “the sister hood of the pantsuit” to the Governor of Montana took to the stage and started barking back at the McCain Bulls. Barrack Obama is a lot of things, but one of them is not stupid. It’s “Macro Time” - get used to his orchestrating this daily market distraction. As an old Chinese proverb goes, ‘one dog barks because it sees something; a hundred dogs bark because they heard the first dog bark.”

Of course, away from trying to figure out whether the Bulls or Bears are more right, the global marketplace will be issued economic and geopolitical facts, daily. Facts are stubborn little critters that can be hidden from the market, until they can no longer be ignored. Last night the Federal Deposit Insurance Corporation (FDIC), which was created during this country’s last economic depression in 1933, sprayed some bear mace in the bull’s eyes, reminding them that we are still in the early stages of the US bankruptcy cycle. Head of the FDIC, Sheila Bair, stated “Quite frankly, the results were pretty dismal, and we don't see a return to the high earnings levels of previous years any time soon.” Good thing she is being “frank”!

There is a front page article this morning in the Wall Street Journal that talks about the reality that US banks actually have debts that come due, and that they’ll need to refinance them at higher rates. Isn’t that a shocking revelation of factual data! Meanwhile Morgan Stanley’s head of foreign currency research is making a “call” that Asian currencies can go down a lot when economic growth slows. Eureka! They didn’t ask the question first, but they are finding the right answers!

I am smiling partly because I can’t believe I spent so much time this morning writing about animals. I am smiling partly, because the expiration date on the cream for my coffee this morning said August 30th – that’s when I get paid my hunters ration of interest income on my most concentrated position, 85% cash. I am smiling because we asked a lot of the right questions 9 months ago, and found conviction in the right answers.

Happy hunting,
KM