“Rule #1: Do not lose money. Rule #2: Do not lose money. Rule #3: Never forget rules 1 and 2.”
-Roy Neuberger

Roy Neuberger was born on July 21, 1903, and was orphaned by the age of 12. Mr. Neuberger came to Wall Street on his own in 1929 before the crash and Great Depression. Over the course of his storied career, he figured out a thing or two about proactively managing risk during economic downturns. Neuberger’s “Guardian” Mutual Fund was one of the first no-load funds in this great country.

Today, as Dick Fuld continues to wrestle with one of the most classic investment mistakes people make, I can’t help but be saddened by where Lehman Brothers has brought this great American Capitalist’s namesake Asset Management business. That mistake, of course, is sell what you can, not what you should.

This mistake happens quite often during times of economic crisis. In the end, after firms are forced to liquidate, they end up holding their most toxic paper, rather than their most precious. This is the tail that’s wagging the dog right now in the US stock market. As investment banks, hedge funds, and mutual funds are forced to raise cash and de-lever, everyone on their respective trading desks knows that their biggest investment mistakes remain on their books.

This is why the volume and volatility sirens are ringing again. Its ‘Macro Time’ - from Asian currencies to Brazilian oil stocks, the asset management community is selling what they can. “It’s global this time”, remember? That means that TED spreads widening, European junk bond yields rising, and Ukrainian stocks crashing are all one and the same thing. This is the start of people finally being forced to sell what they should have in the first place.

Asian stock markets continue to crash this morning with the region hitting 3 year lows. China led the way to the downside again, closing down another -3.3%, hitting new year-to-date lows and taking the cumulative loss in the Shanghai Exchange to -66% since the October 16, 2007 nosebleed peak. Japan closed down another -2% overnight, and I remain short that market in the ‘Hedgeye Portfolio’. The only thing that has changed fundamentally in Asia is that the masses are figuring out fact from fiction.

European stock markets continue to be weak after the Bank Of England’s chiefs (Blanchflower and King) outline that their domestic economic situation continues to deteriorate. At a point, this is going to equate to the BOE and ECB cutting interest rates. With commodity led inflation cooling to the tune of -24% in the CRB Commodities Index since early July, European central bankers finally have some room to breathe. The Euro’s decline will raise imported inflation, but at this point commodity prices and economic growth are dropping at a faster pace than currency losses.

In Latin America, stock markets continue to get pounded, as they should. Brazil is actually raising interest rates again here this morning to 13.75% - global cost of capital continues to rise as access to it tightens. Local inflation in Brazil is much like emerging Asia and Eastern Europe – they have a wage spiral component, don’t forget. All the while, as everything from fertilizer to oil gets sold out of asset manager portfolios, the US Dollar continues to strengthen. The greenback is +11.8% since its mid July lows. US denominated cash is indeed being crowned as King!

So what to do next? I say more of the same. I moved back to 84% cash earlier this week as I just couldn’t stand the idea of losing money. Putting my family’s hard earned capital at risk would be reckless at this stage of the economic cycle. Yes, you’ll hear the bulls tell you that “there’s so much cash on the sidelines”, and “people have to own something”… if I hear it once an hour, I hear it 100 times. Unfortunately, that’s both theoretical and consensus.

People don’t have to buy anything. Ask Roy Neuberger. At a bare minimum, never forget his rules 1 and 2.

My new downside target in the S&P 500 is 1209.79.

Good luck out there today,