“No matter how busy you may think you are, you must find time for reading, or surrender yourself to self-chosen ignorance.”
-Confucius
 
I have been spending an inordinate amount of my time away from my screens this month, studying and reviewing economic depressions and crashes. What are they? What causes them? How long can they last? I know – nice life man…  reality is, however, that Jeremy Grantham’s thesis continues to play out. Right brain management (patient and objective study) is crushing the lefties this year (reactive Hank “The Tanks”). Studying is where my most productive time can be spent.
 
Proactively preparing yourself for predictable behavioral patterns generally puts you in a situation to take advantage of an opportunity. If I wasn’t in print with warnings of this crash, you could chalk me up as just another revisionist historian chirping in your inbox this morning. Unfortunately for all of us, that’s not the case. My being right was never going to equate to a positive surprise in the US unemployment rate, but hopefully it has convinced you that being liquid long cash had some strategic benefits to your balance sheet.
 
As of yesterday’s close, peak to trough declines in the S&P500, US Consumer Discretionary, and US Financials are now at -52%, -65%, and -75%, respectively. Them be crashes folks – and they aren’t all equal. Some of these moves have lasted longer and fallen further. Waking up this morning and being “bearish on the US consumer stocks” is no more unique than being bullish on “Chindia”, private equity, or petro dollars was 12 months ago.
 
In September I moved to 96% cash. As we moved into and out of the October 27th low, I began to patiently deploy some of that cash into equities. While my holding a 62% position in US Cash this morning (see Hedgeye Asset Allocation model above) should hardly be construed as “bullish” positioning relative to other Wall Street “Strategists”, I continue to believe that tremendous short term “Trade” opportunities will present themselves on the long side of this market. Squeezes are more pronounced in bear markets than bull ones. This morning I see another one coming and I will be using any weakness to cover/buy stocks. I have an immediate term squeeze target for the S&P500 of 858 (+14% higher).
 
Last week, my investment process called out 9 specific reasons why the S&P500’s October low of 848 could hold. As of the last few trading days, clearly that has been proven wrong. Bottoms are processes, not points Keith. Don’t mess with Mr. Market. He will run you over.
 
Other than being in sunny California opening our new office, the best news for me is that I didn’t buy the S&P500 until this week. I bought SPY (S&P500 etf) into the close yesterday (see Hedgeye Portfolio). Rather than focusing on my playing Jack Sparrow or Cinderella Man pre-open, you are always best served to watch what I do when the game is on with our virtual portfolio – actions always speak louder than words. I hold myself accountable to both.
 
As I was driving over the Golden Gate bridge after the close yesterday, I reminded myself that being down -4% in my S&P500 position when the US market has lost -18% since last Friday is no reason to beat myself up. I do plenty of that when you aren’t looking. I thought about doing that again here in print this morning; but now is not the time. Now is a time for leadership. So let’s get back to the history books.
 
Throughout 2008 I have discussed that 2007-2009 will look most like the 1 period of consumers savings rates replacing their levered up spending ones. While no period of US economic history is a carbon copy of another, the durations and depths of peak to trough price declines can be studied. The Dow peaked in January of 1973, and picked-up its most bearish price momentum into year end of 1974 (-45% peak to trough). There are only 2 other worse peak to trough declines in the Dow than that one – the September 1929 to July 1932 period (-89%), and the other “Depression” within the Great Depression from March 1937 to March 1938 (-49%).
 
In my macro model, yesterday’s combined volatility (VIX) and volume (NYSE) readings implied another immediate term selling capitulation. Fear of another Great Depression is here. This fear is based on fiction versus fact, and you need to have yourself another cup of coffee this morning and wake up to that reality if you already haven’t. Grantham’s October investor letter walked through some of the math on the 3 most relevant equity bubbles in the 20th century (1929, 1965, and Japan’s 1989). These are the only peak to trough corrections that have exceeded 50%. Yesterday’s S&P500 -52% peak to trough print felt like it should have – a crash. But wait … it’s we’re in a different century this morning. Yes, indeed folks, we are. This is “The New Reality.” Don’t get sucked into the vacuum of the media’s manic narrative fallacy.
 
The most relevant difference between this century and the last one is China. They have the cash now; we don’t. They own our debt; we don’t own theirs. China’s stock market didn’t make a lower low last night - America’s did. Chinese stocks are now trading +15% above their 2008 lows, and Asia traded up across the board overnight… hmmm… how could that be? Shouldn’t Asian trading take America’s lead? Isn’t the USA the land of the financial Gods? Uh, no… not so much anymore.
 
The Saudi’s are being held ransom for $25M by Somali pirates this morning. All of a sudden cartoon characters like Chavez, Ahmadinejad, and Ortega don’t have any leverage with oil trading under $50/barrel. The financial genius of “The Pandit Bandit" should try wearing a black pirate’s patch over his eye when he walks into this so called “Citigroup board meeting to discuss strategic options.” After seeing what’s become of his “bullish on India” call, he’ll already have a limp. I’ll provide the script and a parrot. “Argh! Hi there mateys'… we’re right screwed here again... prepare the anchor… it’s time to take what money we can and jump ship.”
 
Again, pay less attention to Captain Jack Sparrow than studying history. The world doesn’t have the liquidity problem that it had 3 months ago. “Investment Banking Inc.’s” handshake has a credibility one. This storm of confidence is rightly held, but like those of 1932 and 1974, it will creatively destruct. “The New Reality” is here. New leaders are emerging. Be patient, study, and take your time. Never mind the levered long activists and the “lefty reactivists” - they are preparing to walk the plank. And yes, they are depressed.
 
Have a great weekend.