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“Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”
-Abraham Lincoln

This market is having a heck of a time evaluating Obama’s power. We posted a note this weekend discussing Obama’s expectations. This week’s ‘Economist’ actually has “Great Expectations” on its cover. Call it consensus or call it “The New Reality” – those are two very different things, with varying debates, definitions, and deductions.

Obama’s rhetoric gives his core constituency hope and, at the same time, makes his doubters cringe. Obama’s congressional and senatorial power, on the other hand, will be something that his supporters and detractors alike are just going to have to deal with. The market traded violently on this last week, trekking almost +19% higher from the October 27th S&P500 low of 848, then swan diving for its worst 2 day-move since 1987 (Wednesday-Thursday post election), and finally rallying on Friday, closing +2.9%.

Political power can be both scary and exciting, all at once. Ask the Chinese how that works… yesterday they reminded the world who is wearing the global economic power pants. They plugged in a domestic stimulus plan that could very well end up being the same size (in US dollars) as Paulson’s bailout plan. In response, China’s stock market (which we continue to be long via the FXI etf), gapped up +7.3% overnight, leading Asian and European markets higher. This is all part and parcel of our 2009 Investment Theme, “The New Reality.” If you are liquid long cash, to the tune of say $2 Trillion in reserves, you wear the pants in this game. If you are levered long and in dire need to borrow… well, you can follow your new leaders, and/or just get out of the way.

In “The New Reality”, leaders will continue to emerge in many more places than the said “make money” capital of consensus. This weekend on page 33, Barron’s was kind enough to spend the money on a nice full page color shot of the New Haven skyline. There is a Wall Street here at Yale – it’s at the corner of Church Street right next to the New Haven Green. There are some weird people down there reading books and stuff…

Barron’s also highlighted one of my favorite global market strategists, Don Coxe, this weekend. Mr. Coxe is stationed in Canada, so his suit was doctored up a little with the simply Canadian mauve tie that would make him look a little quirky in a meeting of the minds at Goldman Sachs, but he cares about what “they” think about as far as he can throw them. Today, Goldman’s stock price is testing its IPO price of many moons past. Some “dude” threw out to the crackberry community on Friday that GS could be “LBOd”… that was a lot funnier than Coxe’s cravat.

Goldman isn’t alone in this fight for futility. They are just part of the losing team that is being ‘You Tubed’ by America. Although Merrill Lynch was force fed to Bank of America, they are still lighting up Barron’s with their full page advertisements of purporting to “be there” for the client. This weekend they colored a full page with a headline that says “Volatility, the Markets and You”… seriously, I can’t make this stuff up. Volatility, measured by the VIX, lost another -6% week over week, closing last week at 56.10, down -30% from the nosebleed high of 80 that the market locked in at the S&P500’s October lows. Thanks for reactively preparing us to read yesterday’s news guys.

After seeing his stock tank from $31 on his IPO payday last year to $7 something today, Blackstone’s Steve Schwarzmann is going to be speaking with Merrill’s “clients” tonight on one of these revisionist “totalmerrill.com” events. I suspect that he is going to be discussing part of his Wall Street Journal Op-Ed call to action from last week where he was pleading for “full transparency in financial statements”… Again, I couldn’t make this stuff up if I tried.

Power is money. Money is power. Right? What about political power or the power of your word? These are simple questions with complex answers. I won’t spend any more airtime on them this morning, as there is plenty to do here with the Chinese ringing the game time buzzers. European markets are up for the second consecutive day, trading +3-4% across the board. Russia has shot up another +9.3% this morning after Medvedev reached out to Obama, and the Russian Foreign Minister extended the US an olive branch for the first time in, well… a long time. Russia has rallied +51% since the October 24th low. That’s a powerful move!

Andrew Barber posted a great note to our Research Edge Macro clients this weekend titled “Eye On Alliances: The Obama Factor” (www.researchedgellc.com, 11/9), diving into some scenario analysis from Iran to Russia to Venezuela, from the perspective of the price of oil. In this increasingly interconnected global marketplace of risk factors, I consider it borderline reckless not to be doing “the Macro” work. Power is shifting, quickly, across asset classes and geopolitical spectrums. Power is not only about money. Power can be leveraged as much as it can be abused. Power is best allocated to the men and women of character.

There will be a power struggle at the S&P500 line of 958 today. A close above that line makes us incrementally more bullish.

Best of luck out there today,

Long ETFs

JO – iPath Coffee – All India Coffee Association announced estimates that total output for this harvest may drop 8% to 270,000 tons from 293,000 tons forecast by the state controlled Coffee Board on unusually rainy weather.

EWL –iShares Switzerland- Credit Suisse announced the acquisition of a Saudi Arabian brokerage that it already held a stake in to increase its wealth management activities in the Kingdom.

EWA –iShares Australia- Reserve Bank of Australia cut its 2008 economic expansion forecast to 1.5% from 2 %. Australian home loan approvals fell in September by 2.7%, for the eighth consecutive monthly decline.

EWG – iShares Germany –Volkswagen AG Audi division, reiterated its target of 1 million vehicles sold for the year after sales rose 7.2 % last month. CPI and GDP data are reported later this week for Germany.

FXI – iShares China – China’s government announced a $586 billion stimulus plan to sustain growth pledging “fast and heavy-handed investment” and a “relatively loose” monetary policy through 2010. PPI data for October showed a 6.6% y-o-y level, a second consecutive monthly decline.

VYM – Vanguard High Dividend Yield ETF – CDS markets for the most part responded positively to the Chinese stimulus plan with the exception of the US where credit concerns for the auto industry helped prices hold firm.

Short ETFs

UUP – U.S. Dollar Index – The dollar weakened against the EURO and GBP on the G20 Sao Paulo meeting statements and Chinese stimulus plan.

EWW – iShares Mexico - Fitch Ratings cut Mexico’s debt outlook to ``negative'' on concerns over the recession in the US, reduced foreign investment and declining oil prices.

EWJ – iShares Japan - Machinery orders declined 10.4% for Q3 matching the biggest drop on record. Heavy machinery manufacturer IHI Corp. reduced its full-year profit forecast and announced a reduction or elimination of dividends on concerns over rising yen, the latest in a string of similar guidance from major Japanese industrials.

EWU – iShares United Kingdom – HSBC announced that it has set aside $4.3 billion for bad loans in the US. Nationwide Building Society reported that mortgage lending declined by 72% y-o-y in the fiscal first half.

IFN – The India Fund – India will release industrial production growth data for September on Nov. 12th , one week earlier than scheduled. Society of Indian Automobile Manufacturers released data showing that passenger-car sales declined 6.6 % last month, while total vehicle sales declined by 14% - the largest drop in 8 years.

Keith R. McCullough
CEO & Chief Investment Officer