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Consider the following two Bloomberg quotes/assessments of the zoo keeper, Hank Paulson, showing his stripes and bailing out his banking buddies this morning:

1. ``Distasteful'' … ``not consistent with a capitalistic system''…``But however distasteful, they are necessary to restore stability to the financial system.''
2. ``We're looking today at an absolute sea change in the global financial system in terms of liquidity,'' …``This could be the time that breaks the back of the credit crisis.''

The first quote was from a man with credibility. The second is from a man who lost his. Paul Volcker is the non-group thinking and unpopular Wall Street fighting man who understands economic cycles and how to manage them. CEO of Blackstone, Steve Schwarzman, is the man who doesn’t have a business without a re-liquefied ‘Investment Banking Inc.”, and sold stock en masse into the public after levering up American banks with rotten bananas.

As for me – as many astute and underperforming “hedgies” will ask, “who the heck are you?” Well, I’m just a slow running marathon man in training for the Icelandic snow shoe race. Given that Iceland’s stock market just opened down -76% this morning, I’m thinking that airfare and hotels should be pretty cheap, and I definitely have a better shot of not coming in last up there.

Yes, I’m smiling this morning… partly because watching this whole Paulson zoo is entertaining, and partly because we had our biggest up day in well over a year yesterday in the ‘Hedgeye Portfolio’. How can’t a man smile? All the way from New Haven, I can hear the monkeys in the Bronx zoo clanging their hands together and screaming this morning. All of them made money on the long side yesterday – I hope. It was one of the biggest up days in the history of stock markets. You should pay me the equivalent of the surcharge they tack on to bring your kids into the petting zoo to perform on a day like that, not 2 and 20!

Bring out the bananas and lets all swing from the light fixtures this morning. “The bottom is in!”… “I love fertilizer stocks”… “this is a generational opportunity”… c’mon – let’s get serious.

Intraday yesterday, my Macro Research Captain, Daryl Jones, posted a note to our RE Macro clients to “let them run”, and we put ourselves on the tape with an immediate term target on the S&P500 that was higher. This morning that sell signal immediate term “Trade” target for the S&P500 is 1025.11. We’ll be selling some of the equity exposure that we bought last week at that level. We’ll also be re-shorting a lot of the stocks that we covered, fortuitously, last week. Sell high, buy low.

Geographically, in Asia, we remain bullish on China and Hong Kong. We remain bearish on Japan and India. After the shorts were squeezed for a +12% move yesterday in the India Fund (IFN), we started to short it. This morning, Japanese stocks re-opened post Monday’s holiday, and closed up a massive +14.2%. We will likely be re-shorting Japan via the EWJ exchange traded fund that we covered when it was down. Sell high, buy low.

European stock markets are flying from the tree top branches again this morning, chirping like this is easy. We are naked long Europe via our position in Germany’s ETF, the EWG, which was yielding over 11% when we bought it. In looking at what to sell against it (yes, hedging is cool on up days), the British are front and center on our macro screens this morning. The UK printed a surprisingly inflationary consumer inflation report for September of +5.2% y/y. That’s the highest inflation rate they have shown us since 1997, and this has happened despite commodities melting down. Why? Well, it’s pretty straightforward… their currency has been in free fall, and that imports inflation. British stagflation will get them a short order from us this morning via the EWU exchange traded fund. Sell high, buy low.

Not all hedge funds have our performance year to date. Maybe that’s why I annoy some of them so much, but then again, if some of those guys actually kept on the trades that they emailed me about in Q3, they have probably been fired by now. David Einhorn, who I respect, has been a standout for nailing the Lehman short call, but (per Bloomberg) even he lost something on the order of -17% in September – some of that has to be due to the good ole boy’s up there at “Investment Banking Inc” who banned short selling in the financials (and the consumer, aerospace, etc…) stocks with that mid month changing of the rules on the fly. If Einhorn was down that much, you should be scared to see some of the banana flinger’s numbers that have yet to be released.

Back from the zoo and over to reality, the most important macro move this morning is that the US Dollar is breaking my short term momentum indicator on the downside (inflationary). That level in the US$ Index is $81.07, and it should be monitored as closely as CNBC might actually monitor the TED Spread today (barring any caricatures of Goldilocks skipping across the screen stealing the real estate). Spreads are wide. Bonds are weakening. The Paulson plan is to bail out his buddies, and that is net net negative for Americas balance sheet. Throwing $10B each over to the boys on the bench at Goldman and Morgan Stanley is what he is doing this morning. Dick Fuld must be sitting there wondering, ‘hey – where is my banana?!?’

Good luck out there today,
KM