“You been hearing about how bad I am since you were a little kid with mess in your pants! Tonight, I'm gonna whip you till you cry like a baby.”
-Muhammad Ali (1974, to George Foreman prior to the “Rumble In the Jungle” fight)

For the better part of this year I have been the annoying bear in some of the “hedgies” bonnets, and I am happy to be their little pet bull this morning, with a gun. One of our major investment strategy calls this year has been that 2008-2009 was going to most resemble the mid 1970’s. No, not a “mid cycle slowdown”; not the early 1990’s; and certainly not a “Great Depression”…

This brings me back to this day in 1974, when it was “global this time” and the entire world watched Muhammad Ali “Rumble In The Jungle” with George Foreman – he knocked him out in the 8th round. Sports fans will recall that it was the “Rope-A-Dope” strategy that Ali used to dizzy the dancing bear. Having been a growling bear for the better part of the last 12 months, I think I have learned a thing or two about dancing with them. You see, my Dad prepared me for this… but not by the avenue of his usual hockey lessons, rather by warning my sister Cheryl’s boyfriends that they “didn’t want to dance with the bear!”

Across the global macro risk factors that I grind through every morning, I have not had this many positive signals in my notebook since 2003. Everything that matters in my models occurs on the margin. While I am aware of consensus, I do not respect it for anything other than what it is – a leading indicator as to what part of the jungle I should be beating my own path down next. Bears don’t scare me. I know them well… and on nippy mornings like this, I get excited to dance with them.

So let’s dance… globally:

1. Asian Bears beware…
-China, Hong Kong, and Taiwan all cut rates
-“Heli-Ben” Bernanke dropped oodles of cash on Korea and Singapore, opening up $30B swap lines
-Hong Kong’s stock market closed up another +12.8%... pop, pop, bang! Rope-a-dope… pop!
-Korea, Japan, and Singapore closed up +12%, +10%, and +7.8%, respectively… pop, pop, bang!
-Asian currencies had their biggest up day in a decade… pop, pop, bang!

2. European Bears be worried…
-If prices close where they are trading now, this will be the 1st consecutive 3-day rally in Europe in October
-Germany is up another +4.6% after printing a NEW LOW in unemployment, coming in at 7.5% vs. 7.6% last month
-European “hedgies” are still whining about being run over by Volkswagens, or were those Porsches? Pop, pop, bang!@*%!
-Russian Bear hunters are back, putting up a +9.4% up day in their market; Russian stocks are +28% since 10/24… pop, pop!
-Russia’s Medvedev gives a state of the union address to the country today; fyi, it won’t be bearish!
-Eastern European countries like Hungary are getting bailout $ from the IMF and World bank; Hungary is +4% this morning… bang!
-France’s PPI inflation came in lower than expected for the month of September; deflation is taking hold globally…

3. Rest of the World Bears, you have a target on your heads…
-Middle Eastern stock markets (who have lost ½ of their value since May08’) are vying for their 3rd consecutive up day… pop, pop, bang!
-Oil is up +13% in 3 days post the “Heli-Ben” dropping of cash on emerging markets… if there is one thing that these countries like, it’s oil up!
-Copper and Nickel have had +12-14% moves to the upside since US rates were cut to 1%; beware of Peruvian bear hunters with guns!
-Brazil and Canada put in +4% up days; with the CRB Commodity Index +6% yesterday, you can’t be short them here…
-The Canadian Loonie has picked up +7% in 48 hours and we are long it via the FXC; I am Canadian, and I support hunting season!

This dancing is global folks. The US Dollar is down another -0.65% this morning, taking its 48 hour decline to -4.2% (we are short it via the UUP). You can thank the USS “Heli-Ben” for that! Pop, pop, bang! That’s the sound you’re going to hear in your newfound genius “short book” of “ideas” if you don’t recognize that being in 96% Cash (like we were in September) is the last thing you do when governments are giving away money for free!

I don’t have to agree with Bernanke, Paulson, or Foreman on much at all here. What I have to do, is be right. One of the toughest things for investors, boxers, and hunters to do is keep the mind focused when opposing thoughts enter the brain. Maintaining balance and sobriety under these emotional circumstances is the key. Otherwise, you are going to get “Rope-A-Doped”… pop, pop, bang!

I think there is at least another +9% left in this S&P500 rally. Our call on being net long China and Germany is starting to play out. Allow me to borrow John McCain’s calling card: “My friends”, the bears, I am calling all of you out of the bushes - let’s get ready to rumble!

Have a great day,

Long ETFs

FXC – Currency Shares Canadian Dollar Trust – The “Loonie” has rallied sharply in the last week, up +7.1%, on the back of a U.S. interest rate cut yesterday and strengthening commodity prices.

EWG – iShares Germany – The DAX is a positive outlier in Europe up +4.6%. Positive earnings reports from Deutsche Bank and Metro, a retailer, are highlighting this action. Unemployment fell slightly more than forecast for October coming in at 7.5%.

FXI – iShares China – The Hang Seng was up ~12.9% overseas and the largest gainer in Asian markets this morning.

EWH - iShares Hong Kong – The Hong Kong Monetary Authority cuts its key interest rate by 50 basis points, to 1.5%.

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 ~3.7%. We like Dividends.

Short ETFs

UUP – U.S. Dollar Index – As we expected and noted yesterday, on the back of a U.S. interest rate cut, the U.S. dollar had its largest one day decline against a basket of currencies (based on ICE’s Dollar Index), since 1998.

EWU – iShares United Kingdom – The Nationwide Building Society reported that average cost of a home fell -14.6% y-o-y, the largest decline since the survey started in 1991. According to the Bank of England’s Blanchflower, “Interest rates do need to come down significantly – and quickly.”

Keith R. McCullough
CEO & Chief Investment Officer