Shifting Gears

Feet on the floor – the weekend is over; it’s time to get at it again. It’s global this time, indeed…

I’ve exhausted my batteries attempting to handicap the US bailout’s timing. This morning, I am going to shift gears back to the global macro grind. The two critical revelations today are that the US government bailout plan went from 3 pages to 106, and that the government bailout contagion isn’t just local; it’s global.

In the UK, the British are seizing and nationalizing their 2nd bank this year. Germany is bailing out Hypo Real Estate (largest German Real Estate investor). The third largest Icelandic bank, Glitnir, needs bailout cash. Belgium’s largest lender, Fortis, is getting $16.3B in bailout capital from 3 countries – Belgium, the Netherlands, and Luxembourg.

European markets are getting tagged on this, as they should. The Netherlands is down over -4%; Belgium is down -3%; and markets from Ireland (-5.2%) to Austria (-3.5%) are waking up to their own European economic and political realities. Away from the global leverage contagion, there are plenty of geopolitical issues at work that need to stay in focus. Austria for instance is seeing record gains in anti immigration support, while the Ukrainians have lost their government in the face of grave Russian threats. These people couldn’t care less about crack-berries and up to the minute coverage out of Washington D.C.

That said, for whatever reason, the Europeans do pay attention to Obama, and the post US Presidential debate polls have moved decidedly in his favor. The Bloomberg/LA Times poll had the post Friday debate score at Obama 49% over McCain at 44%. Interestingly, that same poll saw Obama up 46/33 and 48/36 on who “seemed more presidential” and who is more apt to handle the financial crisis, respectively.

Obama winning certainly doesn’t have positive implications for US free market capitalism as we knew it, but I am having a hard time defining what a Republican thinks that is these days anyway. When it’s all said and done, Regulation and Regionalism may very well be the main outputs of this crisis of confidence. If that’s the case, it will not auger well for the rest of the world. This morning, from Asian stock markets and currencies to European real estate and markets alike, investors are not buying into the fundamental outlook.

Asian markets were led lower by -4.3% and -4.2% meltdowns in Hong Kong and India, respectively. China was closed, but Japan was open, and as sure as the sun rising in the East, the Nikkei closed down again. We remain short Japan in the Hedgeye Portfolio via the EWJ etf, and my immediate target for the Nikkei is 11,493. Last week, we wrote a note titled “Is The Top For The Chinese Yuan In?” (www.researcheedgellc.com, 9/26), and we discussed linear correlations to that potential conclusion. The Yuan is one of the few Asian currencies holding together here, but mean reversion is an unfriendly critter to wake up to. The Indian rupee hit its lowest level since 2003 this morning; inflation there remains sticky, as economic growth is decelerating at an accelerating rate. This is Asia. It is global this time, indeed.

Morgan Stanley is waking up to this today, cutting their growth targets for South East Asia and India. Gee, thanks. Citigroup, is cutting their target for nickel prices by 40%, after the fact as well. These are reactive rather than proactive “investment strategy” calls. Do not expect the quality of the research from these institutions to improve as the zero bonus factor plays into year end planning.

My shifting gears this morning also requires my shifting to finding some proactive solutions to this global economic mess, so expect that from me as we start to invest some of our 96% cash position into market weakness this week. Our research team is especially interested in high dividend yielding stocks which have solid balance sheets. This isn’t rocket science, but stylistically at least, it’s all of a sudden unique.

With Q3 of 2008 winding down, politicians and portfolio managers alike are crying wolf about the worst financial crisis since the Great Depression. The facts, however, paint a different story. The Russell 2000 is actually +2.2% for Q3 to date. Pardon? Yes, facts are stubborn little critters aren’t they?

Good luck out there this week,
KM



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