Firing The Tank

“If you can’t explain it simply, you don’t understand it well enough”
-Albert Einstein

The US Treasury, and most market strategists alike, were not explicitly calling for a market crash post the removal of their socialist supported and un-American “short selling ban.” Therefore it is very hard to rationalize why you should be looking to them this morning for solutions to this mess.

If your strategist, broker, or money manager is just coming to realize that managing risk in an interconnected global market of risk factors requires getting their feet on the floor before 5am, shame on them. They were not prepared to take advantage of this opportunity. Now they are reacting to it. If their “business model” is prefaced on getting rich by levering up your money, they should at least be at their desks when the game is on. Japan was down another -9.6% overnight, taking it down -24% for the week – that’s a crash that needed to be proactively managed towards and understood.

All of the losers in this industry will be pointing fingers this morning, tomorrow, and the next day. That’s what losers do. There are plenty of people who need to be held accountable. That will happen, trust me. If no one wants to call them out on to the mat, I will. Hank “The Market Tank” Paulson went out and hired an associate level banker from guess where, Goldman Sachs, to manage your government’s $700B bailout program. Hank hired another ‘Yes Man’ for the job. He should be embarrassed. Hank, it’s time for you to resign.

The US government’s resolve is to cut interest rates like Japan did, to negative, on a real basis. This is why the market goes down every day. People get it. Letting John Mack and his ‘Investment Banking Inc.’ cronies borrow free money at the Fed’s discount window at a record weekly pace does nothing but put more of your money into the hands of people have no proactive risk management process. Rather than American capitalism, this sadly reminds me of Denzel Washington’s recent movie “American Gangster”. Hank Paulson is playing Frank Lucas, and he is signing off on the issuance of “blue magic” bailout packages to the addicts. Morgan Stanley revealed yesterday that they are on the hook for a $2B casino in Atlantic City that they ingeniously committed capital to at the top of a global economic cycle! Maybe Mack, Lucas, and the Pandit Bandit can all head down to AC tonight and roll the bones with some of that tax payer money!

Never mind “understanding it well enough,” the said leaders of our financial system didn’t understand it at all. We need to get these people out of their reactive decision making seats immediately. On CNBC’s “Fast Money” last night, said trading “guru,” Joe Terranova, started the show off saying that Paulson should “step up and buy US stock market futures” this morning. C’mon Joe. That was beyond embarrassing. It also provides a metaphor for how ridiculous this global stock market mania became. We are speaking with our friends at InTrade about getting odds on the board for the date of “Fast Money” being taken off the air. These entertainers should not be able to broadcast their perpetually reckless bullish views to our children.

“Emotion has gripped this market”… “Fear and rumors are driving everything now”… “This market is no longer moving on fundamentals…”

Now that the S&P500 has dropped -42% since last year on this very same day, that’s what the revisionist historians are saying. Ignore these addicts, and find someone you can trust. We need transparency and accountability. We don’t need excuses and finger pointing. The market is moving on fundamentals. Those who do not have a fundamental and repeatable investment process are going to go away. It’s your money they are managing. You are their boss.

As I indicated on the Portal into the close yesterday, “I BUY.” I have moved our ‘Hedgeye Portfolio’ allocation from 96% Cash on 9/19 where we called this unfortunate crash (see “Beware October 3rd, 2008”, 9/19/08) to a 70% Cash and 30% Equities position. Let’s be clear, with 70% of my family’s hard earned money in cash, this doesn’t mean that I am bullish. This means I am less bearish.

There are 3 positions we take on stocks and markets alike here at Research Edge: Bullish, Bearish, and Not Enough of one or the other. For the better part of the last 12 months, I have been of the “Not Bearish Enough” camp. Now I am Bearish, but moving toward Bullish, for an immediate term “Trade”. I wrote to one of our smartest clients last night that my max downside level in the S&P 500 is 821.56. That’s another -9.6% lower than last night’s close. On the way down, our equity allocation will be moving up.

Have a process. Be patient. If you can’t explain your investment style simply, “you don’t understand it well enough.”

Have a great weekend,
KM



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