Confucius Says...

11/04/08 03:01AM EST

“And remember, no matter where you go, there you are…”

This is one of the simplest, yet most relevant quotes in my investment notebooks. In a word, I call it accountability. Hide from it at your own risk. There’s a new sheriff in this town of global market leadership – her name is ‘You Tube’… and she will hunt you down.

The transparent drama of political life in this country will finally find an apex tonight. Obama will likely be accepting a rock-star victory at a reception in Grant Park in Chicago, Illinois, while the “Straight Talk Express” will be chalking up another Presidential race loss… this time, at the Biltmore in Phoenix, Arizona.

The paths of these two men provide a metaphor for where the United States has been vs. where it’s going. Grant Park is 319 acres of open air which hosts America’s mosh pits at Lollapalooza, whereas the Biltmore is one of our citizenry’s sites of haute couture, Cartier watches, and Cindy marrying the “Maverick” back in 1980. “No matter where you go… there you are.”

Much to the chagrin of the bears who are running around pitching my 9 month old “Macro” thesis’, we’ve been all “bulled up” as of late. We’ve been using Obama’s pending election, credit spreads narrowing, and earning’s season ending, as a trifecta of catalysts for a new beginning. No matter how good or bad a year you are having in this market, you have to have your feet on the floor this morning, proactively managing towards tomorrow. People don’t care about your October anymore. They want to know where you are today, and where you are going next. “No matter where you go… there you are.”

So where to next, “Mr. Mucker”? While it’s nice to be called “Mr.” these days, I do still enjoy the odd crackberry addict firing off at me, calling me names. It inspires me to work harder. So let’s strap on the analyst pants and get back to the notebooks. First, for context, let’s go through the math. Since our “Buy’em” Early Look note from 10/27 (, the S&P500 has rallied from 848 to 966 (up +14%), Volatility (VIX) has plummeted from 80 to 53.68 (down -33%), International stock markets have been squeezed for anywhere from +15-30% moves, the US Dollar has lost -3% from its peak, and international currencies have stopped going down. “No matter where you go… there you are.”

Context is always critical when attempting to proactively predict markets and/or the tail risks implied therein. Respect history, or it will teach you lessons the hard way. With the aforementioned bullish macro backdrop, you have to face the facts this morning and look towards a less dark future. Obama’s win is the obvious catalyst that global stock markets have started to discount, but the less obvious ones are A) that the yield curve continues to steepen and B) inflation readings continue to dampen. This combination is a powerful one. It gives countries from Asia to Europe the objective facts needed to join hands and cut rates. The Reserve Bank of Australia cut rates this morning by another 75 basis points to 5.25%, and on Thursday, both the ECB and the Bank of England will be cutting them again as well. Don’t be short that calendar.

In yesterday’s Federal Reserve Senior Loan Officer Survey, the simpleton’s conclusion should have been more of what we have been calling for the past 9 months – access to credit continues to tighten as cost of capital continues to rise. No, “Heli-Ben” dropping money from the heavens hasn’t done a darn thing for 30 year mortgage rates other than inflate them. No, Paulson’s Biltmore Club collaboration for “Investment Banking Inc.” hasn’t helped one corporate borrower who needs long term debt financing – 10 year Treasury yields are testing 4% this morning - they are breaking out!

No, this won’t make sense to all of the “hedgie” freedom fighters who said they “don’t do Macro”… nor will it help my 60% position that I still have parked in US cash. Cutting rates to zero doesn’t inspire one to save anything. Cutting rates to zero ultimately means you can only RAISE them next! That’s why long rates are headed higher as short one’s nosedive. This, all together, is outstanding news for what we have labeled as a Research Edge Investment Theme for 2009 – “The New Reality.”

“The New Reality” is that yesterday’s Wall Street is going away. They can house it alongside the horse and the buggy whip at the Biltmore museum. Bush’s administration will be gone. Paulson’s team will be too. This is great for those looking for new beginnings. This is great for Americans who are liquid long cash. Borrow short, lend long. Charge those in need of leverage a healthy premium. Rinse and repeat. “And remember, no matter where you go, there you are.”

Our immediate term target for the S&P500 is now 990. A close above that level gets my allocation to US cash under 50%. A failure, and close below that level re-sharpens my bear claws.

Have a great day,

Long ETFs

JO – iPath Coffee – Arabica futures declined on ICE on further anticipated index investment outflows. Vietnam Coffee and Cacao Association warned producers face major bottleneck unless banks open credit lines to wholesalers.

EWG – iShares Germany – Eurozone PPI was reported for September at +7.9Y/Y, lower than expected on declining oil costs. BMW traded up 8% after guiding for ``clearly positive'' earnings after production cutbacks.

FXI – iShares China – CSI 300 index declined over 1.5% as basic material and energy companies guided lower on falling global commodity prices. China’s top tin producers announced significant capacity cuts as demand slackens.

VYM – Vanguard High Dividend Yield ETF – Depository Trust & Clearing Corp. will publish details of the top 1,000 credit default swaps today after 5PM, under regulatory pressure. Information will include gross and net contracts outstanding as well as trading volume.

Short ETFs

UUP – U.S. Dollar Index – The Euro rose against the dollar today on declining money market borrowing cost, anticipated rate cut from the ECB in 2 days further increasing liquidity.

EWU – iShares United Kingdom – Apparel retailer Marks & Spencer up over 10% after reporting smaller than expected loss, continued dividend. RBS declined 9% on write-down’s, declined to forecast full year results.

IFN – The India Fund – SENSEX and the Rupee rose for fifth consecutive day. Finance Ministry reports that the Reserve Bank may open 100 billion INR credit lines to the National Housing Bank and Small Industries Development Bank to increase flows for mortgages and small companies.

Keith R. McCullough
CEO & Chief Investment Officer

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