Don't Forget

It’s ‘Macro Time’, and now we have ourselves what I like to call ‘some pin action’ out there! Right on time, as earnings season melted away, volume and volatility have melted up. Feet on the floor – it’s time to find the new order of free market winners and losers on Wall Street!

Hank Paulson isn’t much of a free market type anymore – but hey, no one ever accused politicians of being free market capitalists. The current Republican Administration is drawing on the “wisdom” of a man who oversaw the creation of massive leverage and liquidity risks while he was getting paid as an investment banking CEO at Goldman Sachs. I have to give credit where it’s due, this man is getting good at painting both sides of the political fence. But at the end of the day, don’t forget that he’s all for privatizing profits, and socializing losses!

Founder and retired CEO of Vanguard, Jack Bogle, was suggesting something along those lines last week in an interview, so I can’t take credit for my negative view on ole Hank all on my own. What I can do, however, is thank Paulson for the “Trade”. With the S&P 500 at 1219 at 10:57AM on Friday, I wrote a note to our clients (time stamped on our Portal for transparency/accountability purposes), to get long the US market for a “Trade” at oversold capitulation lows.

Why is it that people capitulate? Rather than pontificate on as much, it is best to go back to the bookshelf where Richard Peterson has done some of the best work on the neuro-chemical realities associated with the brain’s decision making process. In his 2007 book titled “Inside The Investor’s Brain”, Peterson wrote a great chapter called “Framing Your Options” that debunks why humans consistently revert to panic selling.

Peterson explains that “when strong emotions take hold, they overwhelm the pre-frontal cortex and drive thinking… strong fear, and the physiological effects of stress hormones, will predispose one to catastrophic thoughts of further declines.” This is exactly what happened on both July 15th, and September 5th of 2008, when the S&P 500 registered intraday panic lows of 1201 and 1218, respectively.

Fortuitously, I am in print with “buy” notes on both of the aforementioned days. Call me lucky, or call me right – I am indifferent. In this business, unfortunately, you don’t get paid unless you remind people of facts. There is no NFL Sunday Instant Replay – or should I say there wasn’t. That’s why we have created the “Hedgeye Portfolio” – accountability is what investors want, and I am all in for that. As proud as I come across to you when we are winning, is as harsh as I will be on myself when I am wrong. That’s not my politics. That’s just how I have always played games where I have a passion. Every day, we wipe the slate clean.

Hank Paulson is telling the world he is stop-gapping the bleeding in US Housing, and starting anew. The problem, of course, is that his solution is an immediate term “Trade” to “stabilize financial markets”. The intermediate “Trends” in US Personal Savings, Leverage, and Housing will be revealed in the next 6-9 months, and the likelihood of his sticking around to see it through is a big question in my mind. With McCain overtaking Obama in the Gallup polls this weekend, odds go up that Paulson keeps his job. That scares me.

When Paulson gets on TV again today and tells you his government bailout plans are the right ones, don’t forget that this is the same man who told you that the “worst of the credit crisis is behind us” five months ago. Don’t forget that he did not proactively prepare his former investment banking firm for this global financial tsunami. Don’t forget to keep this market’s up move from Friday’s lows a “Trade”.

I have an upside target for the S&P 500 of 1277.56, and that’s where I’ll start selling again.

Good luck out there this week,
KM



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