“Insanity in the individual is something rare… but in groups, parties, nations, and epochs, it is the rule.”

The math isn’t trivial this time. You had 3 different opportunities in the last 3 trading sessions to buy stocks in our buy zone. At a bare minimum, we hope you covered. The madness of the media and the crowds alike was untenable. Volatility index (VIX) was trading over 80, and stocks were selling off on LOW VOLUME. This was not a tough shot to take.

If you aren’t into these simple quantitative market factors, surely you could have found a few stocks that were “cheap”. No matter what your investment “style”, once again, we are all looking back now on what was nothing short of a fantastic sentiment-driven buying opportunity.

On the sentiment front, we posted a note to our RE Macro clients intraday yesterday titled, “They are right freaked…” (www.researchedgellc.com, 10/28/08). This morning you can add two more sentiment surveys to the simple thesis that freaking out alongside your boss isn’t going to differentiate your career. The Institutional Investor Bullish to Bearish survey came out this morning with a -30 delta. That locks in last week’s survey as the low print in weekly investor bearishness. This comes on the back of the worst consumer confidence report EVER (yesterday), and a weekly ABC/Washington Post consumer confidence report this morning that again bounces off last week’s Barron’s Bear taking a chainsaw to a Bull’s head front page lows…

If you want to be part of investing “clubs” or run around scared of your own shadow, find a scary costume and meet the “hedgies” at their latest and greatest conference of “one on ones” in Midtown Manhattan. Halloween is right around the corner and you can get right freaked out, paint your faces, and scream and yell – just wear your Merrill Lynch badge and no one will find your behavior out of the ordinary. If you are part of a “hedgie” group, party, nation, or epoch, you are now being ‘You Tubed’ by America.

Today is the anniversary of “Black Tuesday” (1929). When we wrote our “Beware of the stock market crashing” note on 9/19/08, we did point out that Octobers are generally bad during bear markets. I can assure you that as simple as that calendar catalyst call looks today, it mystified the “hedgies”. Eerily however, some of the same “smart money dudes” were equally up in arms with me when I printed my “Buy’em” Early Look note 48 hours ago. I don’t know who pays these black cats 2 and 20 for buying high and selling low, but man would it be entertaining for their investors to read some of the self professed genius from the archives of their emotionally charged, no spell-check, crackberries.

Now that I have painted a few victory laps into this note, allow me to make one more emphatic “call” – this is NOT a Great Depression! Allow me to point you to the latest book I have been grinding through by Amity Shleas titled “The Forgotten Man.” This, folks, may very well be a Depression in the halls of compromised “Investment Banking Inc.” but it is far from it for we capitalists who are flush with cash looking to feed our families without using leverage.

In 1883, Yale’s William Graham Sumner defined the “Forgotten Man” - “he works, he votes, generally he prays – but he always pays…” Those who don’t respect history are definitely feeling shame about that now, and they should. Patterns repeat. Times are changing and it’s time to rebuild this American capitalistic system from the bottom up, not the top down. This country is oversupplied with men and women who are transparent and accountable. It is time to empower them with our trust.

The politicized “Heli-Ben” may very well give us commoners a shot today at borrowing money for free. Someone asked me in the morning meeting the other day if I would borrow money from the Fed if I could – I did a quick calculation and said, “why yes… I would borrow $1 Trillion dollars from the Fed at zero interest rates!” That’s actually what the latest bank holding companies of America (Morgan Stanley and Goldman Sachs) should do. Then, rather than believe they are God, they very well may become the financial equivalents of one. Doesn’t that possibility make your feel confident in our system? It’s cool isn’t it? Haven’t they earned our trust? Shades of Japanese and all…

The Nikkei closed up another +7.7% overnight in Japan, so we’ll be re-shorting it. After covering all but 4 of our short positions ahead of yesterday’s +10.8% short squeeze in the S&P500, we have a long list of short sales to re-populate on our books. Timing is everything, and we respect that and math above all else. There is a chance that Japan’s new government to cuts rates for the 1st time in 7 years this Friday. Yes, there is a shot that we “Forgotten Men” can actually borrow one tree-lion ($1T) dollar-zzz for free – the only caveat is that we may have to do it in Yen. Maybe that’s why everyone wants that Asian currency all of a sudden…

Yesterday’s resistance level in the S&P500 now becomes a support level. I think the S&P can continue to get squeezed all the way up to 1026, and nothing will have changed this market’s intermediate negative “Trend”. That said, 11-17% melt-up moves in the US market are “Trades” you better be on the right side of, or in the land of black cats and “hedgies”, you too may become a “Forgotten Man”…

Best of luck out there today,

Long ETFs

VYM – Vanguard High Dividend Yield ETF – This is a fund of the U.S. largest, blue chip companies and currently pays a dividend yield of ~3.8%.

FXC – Currency Shares Canadian Dollar Trust – Blackstone CEO Steve Schwarzman called Canada an “Oasis of Stability” in the banking crisis at conference in Quebec. While we agree with the view, the source makes us wary.

EWG – iShares Germany – The German government announced that it will finance part of its 500BN Euro rescue package by issuing bonds to banks in exchange for preferred stock. Volkswagen is down ~40% as the short squeeze has ended.

FXI – iShares China – The Chinese government cut the benchmark 1-year lending rate by 27 bps this morning for the3rd time in three months,

EWH - iShares Hong Kong - Radio Television Hong Kong quoted Premier Wen Jiabao as saying that China will "help" Hong Kong through crisis while speaking in Russia. Measures mentioned include increasing communication between Hong Kong and the mainland, speeding up infrastructure projects, ensuring food supplies and expanding tourism to the city according to the report.

Short ETFs

IFN – India Fund – The Rupee advanced for its second straight day and Indian 10-year yields declined on speculation of future rate cuts.

UUP – U.S. Dollar Index – The focus in the U.S. today is the FED, where a 50 bps cut is all but priced in. The US$ has lost 1.7% of its value in the last 48 hours.

EWU – iShares United Kingdom – In follow through from the U.S. yesterday, the FTSE is up~5.0% on the back of the pound rallying versus both the Euro and the dollar. The Chancellor of the Exchequer also pledged more borrowing, to now exceed the 40% limit, to support the U.K. economy.

Keith R. McCullough
CEO & Chief Investment Officer