The New Reality

11/05/08 02:57AM EST

“A man may die, nations may rise and fall, but an idea lives forever.”
-John F. Kennedy

America has voted. Obama wins. Today is another great day for the “New American Capitalist” who is on board with our 2009 Investment Theme – “The New Reality.”

Long gone are the days of the levered long investor. Bah bye to the days of low-cost long term debt. Today, not unlike yesterday, and all of the days between this one and that (I think that sounds like Braveheart!), is a great day to be taking advantage of market opportunities. Being liquid long cash will allow you to prosper in “The New Reality.” The yield curve continues to steepen. Borrow short, lend long, and get out there and prioritize getting your client paid before you pay yourself.

I, for one, haven’t paid myself this year, so I am in the comfortable position of not giving you lip service or a “World Wise” token advertisement. Transparency, Accountability, and Trust may be a simpleton’s set of principles, but they are our promise here at Research Edge. If we do not over deliver on those expectations, please ‘You Tube’ us.

Building back the confidence of Americans is going to be a steeper climb than the recent one in the US yield curve. That said, the darkness of the deepest black hole of US market pessimism looks like it may very well be in our rear view mirror now. The US Consumer’s confidence is responsible for over 70% of this economy’s GDP, and perhaps more importantly, almost 20% of Global GDP. It is “global this time”, and American confidence matters. Don’t forget that.

Don’t forget to quantify things either. Math trumps political rhetoric. Those who doubted Obama’s math in the polls have been run over by the S&P500 train in the last week of trading. As a reminder to the bears, you have missed a +18.5% rally in the S&P500 in the last week alone! We’re still bullish because the math is. Being on the other side of our “Macro” call in 2008 will likely put the onus on you to explain why you deserve to be paid 2 and 20. I wouldn’t want to be that guy.

The math on the sentiment front supports more of the same. This morning’s II Bullish to Bearish survey is flashing a meaningful pop. The delta between bulls/bears has moved from -32 to -18 in the last 2 weeks. Additionally, the weekly ABC Washington Post confidence reading came in last night with its 3rd consecutive weekly improvement. Boxer Jimmy Braddock (played by Russell Crowe in Cinderella Man), used to hear his corner of the ring whisper “Pop, pop… bang”, then he’d come back from being down and out and crush his doubters. American short sellers of consensus, do you hear me now? Pop, pop…

Today is not a day to doubt “The New Reality.” Volatility (VIX) has dropped -40% since some of the masters of the “hedgie” universe capitulated and proclaimed to their faithful book pushers that “we are going to cash!” That was really embarrassing. Market breadth continues to expand not only domestically, but internationally. Breadth on the NYSE expanded for the 6th consecutive day yesterday, after European stock markets punched clock on their 6th consecutive positive day of closing prices. Since October 27th, stocks in Hong Kong have ripped the shorts for a +35% move; even lowly Japan has rallied +33% off the bottom. Thank God, we are long China and that we covered our EWJ (Japanese short)!

Russian stocks opened higher this morning and are flashing another positive divergence versus European equities, trading up another +4%. This is new; don’t ignore it. The Russian Trading System Index (RTSI) has melted the short sellers since October 24th, rallying stiffly for a +52% move. Brazil closed up another +5.2% yesterday. Mexico was squeezed for a +4.5% move, and the Canadians tacked on a +4.1% day on the Toronto Stock Exchange, after their currency appreciated +10% in less than a week! If someone is whining to you about how “impossible” it is to make money in this interconnected global market of asset classes, send them my morning notes. Math doesn’t lie, people do.

Predictably, with the futures down early this morning, the manic media will be talking about “profit taking” and whatever narrative fallacy they can dig up from the talking heads. Don’t listen to them. They are entertainers. They have no proactive process that allows them to predict Macro market moves. Instead, we suggest you enjoy your coffee and sit back and read. This is how new ideas are formed. This is the self directed confidence of the new American capitalist has. This is “The New Reality.”

Our S&P500 line in the sand is now 982. As long as we hold that line, like Braveheart, we are going to stand our ground, continuing to be the new bulls. William Wallace is metaphorically on the advisory board of our 2009 Investment Themes, and he reminds us all on this day of new beginnings that “your heart is free… have the courage to follow it.” An idea like that lives forever.

Best of luck out there today,
KM Your heart is free, have the courage to follow it.

Long ETFs

JO – iPath Coffee – Reuters reports that an unidentified bank seized more than 10,000 tons of beans from an exporter in Sumatra, Indonesia, who missed interest payments. More concern over credit conditions and weather in Vietnam drove Robusta prices higher in London.

EWG – iShares Germany –Chancellor Merkel's Cabinet agreed on a ``bold'' 50bn EUR stimulus package including tax incentives for car buyers to energy efficiency programs. According to Merkel the plan is ``completely different from an artificial, state-sponsored program to stimulate demand that costs billions. We emphatically want to avoid this.''

FXI – iShares China – CSI 300 index gained almost 4% today on announcements of increasing economic cooperation with Taiwan, including direct cargo shipping, and the US election. The finance ministry asked state agencies to keep 2009 budgets frozen at 2008 levels.

VYM – Vanguard High Dividend Yield ETF – Ambac posted a third-quarter loss as it set aside at least $3 billion to pay additional anticipated claims.

Short ETFs

UUP – U.S. Dollar Index – The Euro declined against the dollar on the US election results.

EWU – iShares United Kingdom – Office of National Statistics data released today show that Industrial Production declined 2.2% y-o-y in August BRC Nielsen Shop Index showed a sharp decline in food inflation for October, falling to 3% from 3.6% in September.

IFN – The India Fund – SENSEX and the Rupee rose on second straight day of reported increased foreign equity investments.

Keith R. McCullough
CEO & Chief Investment Officer

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