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``There's a crying need for capital, and now there's a chance that the government will invest alongside''
-David Rubenstein, The Carlyle Group (Bloomberg article by Jason Kelly this morning)

The man they call “Ruby” definitely has that right. I am not sure how that fits within the parameters of free market capitalism, but there is indeed a lot of crying going on these days. You can hear it across the oceans from “Private Equity Inc’s” Super Return Middle East Conference! C’mon guys, there’s no crying in investing.

David Rubenstein is one of the hardest working men in America. He has built a wonderful firm, and hires wonderful people. Moshe Silver and Tanya Clark were two of the finest who I had the opportunity to work with while I was with Carlyle’s hedge fund. Now Mo and Tanya work here, alongside me at Research Edge.

I support Carlyle’s cash flow every day that I check into Dunkin’ Donuts (they own it). This morning I was down there on Whitney Avenue in New Haven with my buddy “Joe The Plumber”. He and I had a quick chat about how great this week has been. If yesterday’s gains hold, this will be the best week in the US stock market since 2003. This is fantastic news for those of us in no need of government assistance. This is a great week for American capitalists with net cash who don’t need “gearing” schemes in order to earn a return.

If the Red Sox can come back from 7-0 last night and stay in the game, so can “Private Equity Inc.”. Never say never folks. As long as “Hank the Tank” is operating the bazookas, you never know how much free money that he and the old boys can endow you with. Once we get through this election, and the Democrats start putting some fire in the zero-transparency holes, things may get uglier however. It will be interesting to see how Blackstone, KKR, and Carlyle deal with non-trivial critters like the “Employee Free Choice Act” (unionization), and a turn in the Queen Mary 25 year-chart of cost of capital (long rates rising). They better hope that the “government invests alongside”. That might be their only way out.

Hope is not part of our investment process. We’re interested in investing the way that people did in the 1970’s. We’re looking for great balance sheets, not levered ones. We’re looking for disciplined capital allocators, not reckless ones. We’re looking for unlevered dividend yields, not manufactured ones. This, of course, is the antithesis of what private equity does. Joe and I are cool with that.

Yesterday we gave some Obamerica “knucks” to another investment great, Jack Bogle, and bought some of his low fee wares via the Vanguard High Dividend Yield fund. The dividend yield we bought into was 4.6%. That’s certainly better than anything called US Treasuries, and importantly, it’s more predictable. The only thing that I can predict about US Treasuries and the man who runs the US Treasury show, is continued reactivity and volatility. There never was a proactive plan. Don’t bank on one now.

From a ‘Hedgeye Portfolio’ perspective (see www.researchedgellc.com for positions), we bought low on market weakness yesterday, and it paid off handsomely. This morning, Warren Buffett is even signing off on Americans buying stocks in their personal accounts. Upward and onward? While we have bought a few bottoms this week, we’re not going to rush out and call it “THE Bottom” – that’s what entertainers do. Be patient and be sure to buyem when they are down, not when they are up. I know, another ingenious strategy from Joe’s buddy from Thunder Bay. Our current ‘Hedgeye Portfolio Allocation’ is: Cash 72%, Stocks 25%, and Commodities 3%.

I don’t like bonds here. I don’t like debt, period. Debt is a disease that needs repeated treatment and de-leveraging therapy before I get interested. Everything has a price.

In fact, oil finally found our price yesterday. We bought it at $69/barrel for two reasons: price and a catalyst. That was the lowest price we have seen in 13 months, and since Goldman is now saying it can go to $50 (which is weird because I could have sworn that they said $140 this year as well), and page 1 of the Wall Street Journal has an article dedicated to it “plummeting”, I BUY. The catalyst, of course, is that “Hank the Tank” and “Heli-Ben” will drop moneys from the heavens again, and cut rates to negative (on a real basis) on October 29th. Creating more free moneys for the monkeys will only re-ignite the bubble bath that so many in this market have come to enjoy since Greenspan prepared the lather and hot tubs from 2001-2003.

Staying in hot tubs for extended periods of time is bad for you. Keep your discipline, and stay away from government supports. Be your own process and stand on its principles. Having to depend on the governments of this world to “invest alongside” will only end in more regionalism, regulation, and a host of ugly and unintended consequences.

Have a great weekend,
KM