Gandhi

To put up with distortions… and to stick to one's guns come what may - this is the gift of leadership.
~ Mohandas Gandhi

Citing Gandhi is what I have had to resort to in the last few days. After 6 consecutive down days that have pile driven the S&P 500 into the mat for a -16% move, we need to draw on everything positive that our humanity’s history has had to offer!

Today is the anniversary of the top of the mania – no, not a mania, THE Mania. On October 9, 2007, the S&P 500 closed at 1565, marking the top in all that drives the madness of a global crowd. From “event driven” super duper concentrated activist butterfly wing nut “hedgies”, to those private equity marauders who bought grain elevators and fleets of rail cars stocked chalk full of potash, it’s all history now. The 1 year cumulative decline in the US stock market rests at -37%.

I say rests, because this is all that this market is setting up to do - take a rest from the panic room selling. This is where we need to respect the efficacy in buying stocks for a “Trade” versus mistaking that duration for a “Trend”. We have been buying stocks for the first time since we went to 96% cash on 9/19, but we have been doing so patiently. There is no other way. Both tops and bottoms in stocks and markets alike are processes, not points. Respect that math over your emotions every time you make an investment decision. Over the course of the last decade I, for one, have had to learn that lesson the hard way.

This morning’s action in this interconnected global market of risk factors is less negative than the 6 days prior. Gandhi wasn’t much of a short seller, but even he can tell you that nothing heals pessimism like time. Time is good, particularly when you have it. That wrenching feeling you have in your gut when the market drops 200-300 basis points in 30 minutes is simply the tail that’s wagging this beaten down dog. It’s the hedge fund community reminding you that they do not own the duration of their trades. They have to sell low.

Asian trading in both currencies and equities was finally less than toxic overnight. After seeing prices that they hadn’t seen since the Asian Crisis, the South Koreans joined arms with the Chinese and Taiwanese last night, said a prayer, and cut interest rates. Normally, this is bad for currencies – this is why the US Dollar has had 3 straight down days – “Heli-Ben” chopping rates and dropping moneys from the sky is inflationary. But even a blind squirrel can find an acorn once in a while, and that’s what Asian currency markets have found this morning – a bid.

Asian stocks were mixed, but the balance of power continues to shift to where we see the proverbial puck going next – away from Japan and towards China. Sometimes we forget that Japan is still the 2nd largest economy in the world. All that means to me today, is that Japan has nothing but market share to give up. Today’s trading action in Asia reflects this “Trend” of regional divergence – Japan closed down another 0.50% overnight, while stocks in Hong Kong rallied into the close, finishing +3.3%. We are long the China and Hong Kong via the FXI and EWH exchange traded funds in the ‘Hedgeye Portfolio’ (www.researchedgellc.com).

The 3rd largest economy in the world is not China - it’s Germany. That’s where we see the most economic stability in Europe right now. That’s where we have been talking about getting invested on the long side. That’s where we put some money to work yesterday, via the EWG etf (after we sold our long position in gold). If you’re going to be investing globally right now, everything should be considered on a relative basis and on the margin. On both of those scores, Germany looks better than bad. Plenty of European governments are reverting to socialist bailout strategies akin to those of Japanese and American governments. Germany told the Italians and Spaniards yesterday that they will have none of it. Instead, they did the right thing, and insured their entire population’s savings accounts. Regionalism is back.

The only savings account being prioritized by the US Treasury Secretary are those of his own and his ‘Investment Banking Inc.’ cronies. Notwithstanding that Hank Paulson didn’t pay taxes on all the Goldman Sachs stock that he cashed in during 2006, he is very consistent in articulating who needs to be saved first – his friends. Yesterday’s US stock market swan dive into the close came on the immediate heels of Hank the tank marching up onto the podium and speaking. Virtually anything he says has risk, and that just is what it is. When questioned by a reporter he told the free world what he’d really like to do with this $700B in bailout money, plow it into ‘Investment Banking Inc.’

This is all very sad, and will be looked upon as so when the crack berries are gone and the history books are written. People are too caught up in the moment right now to realize where these trading hours fit within the context of this great country’s economic history. In less than 30 days, we will have a new President. That will mean the end of the reactive Paulson “plans”, and that has very positive investment implications. In between now and then, a lot can happen. That’s probably why I am reading Gandhi.

Best of luck out there today,
KM