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“What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”-Warren Buffett

There’s nothing like getting lulled to sleep by her turkey, then getting smoked by my wife, Laura, in Scrabble. No matter how many glasses of wine, I am never realistic about my chances at beating her at that game! The morning after is always when reality bites. I get up to do my research, think about the score, and I feel shame. This must be how the “Depressionistas” are feeling about having sold the US market short -18% lower only one week ago.

No, that’s not a typo – that’s an eighteen percent short squeeze. Despite this move, the US market is still on track to post its worst November since 1987. Most people were not realistic that year either. This is why markets crash folks – when perception eludes reality, markets can bite.

This, of course, is an applicable thought to both the long and the short side of trading. Most levered long investors don’t get this on one side, never mind both. Ask one of the private equity firms who are staring down “portfolio company” bankruptcies or the illiquidity illusionists of “activism” what reality is today versus the perceptions of yesteryear. When access to capital tightens, and cost of long term capital begins to heighten, these “business models” fall apart.

Bill Ackman is one of the more entertaining investors in today’s proverbial game of mass media Scrabble. When I ‘You Tube’d’ him on CNBC earlier in the year, I received plenty of crackberry mail from those who were levered up long “Targ-eh” alongside him. Maybe they can all go “channel checking”, do some shopping, and enjoy “Black Friday” with Bill today. This man is the guru of all things real estate and retail, isn’t he?

Ackman said that when he looks at Target, he thinks about it on a “50-year basis”… he better, because that might be how long it takes for this stock to hit his initial cost basis. He also owns a massive percentage of the shares outstanding of another US retailer that we have often shunned, Borders Group. This company is imploding again this week, trading down to $1/share. That’s one dollar – everything starts on one guys! Now where can I get me some of that “50-year” money?

“Ackmanism” and levered long investing is not complicated. All you need is enough people to not be able to “realistically define what they don’t know.” Then you get those people to give you more and more money so that you can average down into positions. This isn’t Buffett style value investing. Nor is it value investing legend Marty Whitman’s definition. Marty puts the gravity of averaging down into losing positions into context best, “a bargain… that remains a bargain… is no bargain.”

As obvious a bargain as the S&P500 was last week (when we bought it), is as much as it isn’t this morning. We sold the SPY (S&P500) short into Wednesday’s close, primarily as a hedge against what people thought they knew, forgot, and then made up a new narrative to explain. The meme machine of CNBC has gone from depression in their portfolios, to euphoria, back to being chalk full of turkey and no idea what to do next because the futures are down.

The S&P500 has moved into an ominous position in terms of risk versus reward. It wasn’t very long ago that I gave you a “down 1%, up 10%” risk management outlook for the US market. After warning “Beware Of The Squeeze” (www.researchedgellc.com, 11/12/08) in mid November, I am now warning you of an up +1%, down -15% setup in the same index. As prices and facts change, I do. The Thanksgiving turkey is done, and the chickens have come home to roost. Volatility (VIX) has dropped -31% in less than a week, and Wednesday’s +3.5% stock market move was on one of the lightest volume days of the month. This is a bad brew.

How much did Bill know about Borders? How much does the Street know about Mumbai, India? Has Bill been to India? Have Indians been to Borders? In closing, maybe that’s the best Thanksgiving idea we have this morning. That everyone from India to Wall Street strap on the accountability pants, travel the globe’s bookstores, and start reading about what it is out there that “they realistically don’t know.”

I, for one, have a lot of reading to do. My new downside target for the S&P500 is 757.

Have a great weekend,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold is on path for the largest one month gain in 2.5 years.

TIP –iShares Lehman TIPS Bond --Treasuries are on track for the largest monthly gain in almost twenty years as 10-year yields reached an all-time low this week. The 10-year bid yield this morning was 2.94% with Fed Funds futures indicating a 64% chance of a 50 basis point cut on or before the Fed meeting on 12/16.

OIL - iPath ETN Crude Oil –Crude declined in advance of this weekend’s OPEC meeting in Cairo to discuss further tightening measures after last month’s 1.5 million barrel per day reduction failed to overcome market concerns over decreasing demand.  NYMEX Light Sweet front month contracts traded as low as $53.00, down from above $54.90 in late trading on Wed. before 6 AM this morning

EWA –iShares Australia – The Australian dollar rose to $0.65 USD as of late Wed.

EWG – iShares Germany  -- ThyssenKrupp AG (EWG: 1.01%) announced cost cutting of more than  1 billion EUR on significantly lower sales. Commerzbank AG (EWG:1.09%) announced planes to accelerate the 5.1 billion EUR Dresdner Bank acquisition to complete a 60% stake by January.

FXI –iShares China – The CSI 300 Index 2.2% to close at 1,829.92. Aluminum Corp. of China (FXI:1.34%) traded down as  aluminum futures declined 4% hitting the  Shanghai exchange limit.

VYM – Vanguard High Dividend Yield ETF –Korean manufacturer LG Electronics announced that it is not in discussions to acquire General Electric’s (VYM: 5.2%) home appliance unit. EC antitrust regulators issued a preliminary report today accusing Pfizer (VYM: 2.6%) and other major pharmaceutical companies of using legal actions to deliberately stall the sale of generic medications after the expiration of patent protection, with EU Commissioner Kroes commenting that antitrust actions are likely.

Short ETFs

SPY –S&P 500 DR –S&P 500 futures traded as low as 881.2 before 6:30AM this morning, threatening to cut into the largest weekly gain since 1974. Oil prices and retail promotions for “black Friday” dominate domestic stock headlines.

EWU – iShares United Kingdom – Existing Royal Bank of Scotland Group (EWU: 1.05%)shareholders took only 0.2% of the current offering leaving the remaining 20billion GBP placement in the hands of the government –bringing the total government stake to 58%.

UUP – U.S. Dollar Index – The USD 1.2871 per EUR from $1.2904 yesterday, while the Pound declined to  1.5416 USD.

EWJ – iShares Japan –Data shows factory output declined 3.1% from September while household spending declined 3.8% for the same period.

FXY – CurrencyShares Japanese Yen Trust – Earlier today the USD reached 95.26 yen, from 95.19 yesterday and 95.96 a week ago.