Manage Responsibly

“International cooperation and coordination have been robust, and we appreciate the responsible role China has played during the turmoil”
-Hank Paulson

Hank “The Market Tank” rolled into China last night and gave the aforementioned and overdue praise to the Chinese government for proactively preparing for this global economic tsunami. China acted “responsibly” while Hank behaved reactively. For a compromised Bush Administration, this is both an about-face and a confirmation that the end of American dominance as the world’s economic superpower is here.

When I took an oversized long position in US Equities in mid November, one of my main macro catalysts was Hank Paulson being replaced. That, not bailing out the Pandit “Bandit” at Citigroup, was the biggest contributor to the five day +19% short squeeze rally in the SP500. It was a vote of confidence in team Obama, Summers, Volcker. Now, unfortunately, that catalyst is in the rear view mirror, and all squeeze rallies have less oomph, as a result.

After dropping -8.9% on the first day of December trading, the US market has rallied 6.6% in two days, lifting the hearts and minds of the perpetually bullish. Currently, I have been getting a lot of questions as to why I have a zero position in US equities. One of the obvious answers lied in the math. We booked our gain on the long side of the SPY before Monday’s swan dive, and actually shorted it, making money on both sides. If you simply owned the SP500 for the last 3 days, you lost money. Math, like Paulson’s idea of leadership, does have its inconvenient truths.

We live in an increasingly interconnected global marketplace, where multi-factor asset allocation and risk management models are winning. There was a day, not so long ago, when your average underage and underperforming “hedgie” would tell you, “I don’t do macro… I’m a stock picker.” That was all good and fine, until stocks stopped going up every day. While it’s easier now for everyone to differentiate winners from losers in this game of global risk management, I still think it’s very difficult for investors to find a sell side process that they can use, daily, to augment their own investment process. That’s why I started Research Edge.

Research Edge is a proactive global research and risk management process. We work as a team rather than in silos. We have our feet on the floor earlier than most, and we have our “Eyes On” most things, real time, that we can quantify for you. This isn’t a sales pitch. This is all part of a critical investment theme for 2009 – we call it “The New Reality.”

The New Reality means that you can have a zero position in US Equities, and have an 18% allocation to International Equities. The New Reality means that you can be in cash and that you don’t “have to buy” anything. The New Reality is that country level exchange traded funds provide you the opportunity to be long a dynamic economy like China, AFTER you’ve waited for the “70% OFF” sale. The New Reality is that the self directed investor who has the cash now has the leverage, not the master of the ‘Investment Banking Inc.’ “prop desk” who was having fun being overpaid to lever up your money.

The New Reality is that I am waking up to China closing up another +1.8% this morning. Why be long anything in the USA since the 1st week of November with the SP500 down -14% and the Shanghai Stock Exchange up +17%? Why not think about shorting stocks and markets, like the US, high… and covering them low? I, for one, am a Canadian who has had the lifetime opportunity to live, work, and to be a part of this wonderful melting pot of cultures that the world has come to admire as the United States of America.

While the “Fast Money” CNBC crew tells you what to do, after the market closes. Allow me to submit a proactive process rather than that reactive one. If you don’t want to wake up at 4AM (you shouldn’t), let my family and team do it for you. We may not be right all of the time, but we are more right, more frequently, across global markets and asset classes than most.

This morning, if you asked our soon to be ex-Treasury Secretary what he would do after a 2-day stock market move of +6.6%, what do you think he’d say? I have no idea. If they have anyone left over there, he might call up the Goldman “prop” desk and “get a look.” You can decide for yourself whether that “look” is a proactively prepared one or not. Thankfully, we wake up every day in The New Reality to new rules of Transparency and Accountability. These levered up investment vehicles now have to show you what they own and mark it to market. The score won’t lie to you; people will.

My “Early Look” this morning is this: Globally, overnight rate cutting is as broad based and reactive as any morning I have woken up to in 2008. On top of the expected panic button 100 basis point rate cut in London by the BOE, we have other former European proactive central bankers freaking out. Sweden’s Riksbank cut by 175 basis points! In Asia, countries who haven’t cut in well over a year did so in unison (Indonesia, Thailand), and central bankers in New Zealand smoked those who aspire to earn a return on cash savings by cutting rates by another 150 basis points.

The market reaction, globally, is not what these central bankers are hoping for. Hope is not a process, neither is reactive management. Despite the two day run in the US market, most of this is based on hope. I see 2% upside and -13% downside from here. I have a zero allocation position (net short actually) to US Equities. I have a 6% position allocated to China. I am part of “The New Reality.”

Pretend you are Chinese this morning, smile, and say goodbye to Hank, and all those who failed to manage your money “responsibly”. Upward and onward into 2009 we go.

Manage responsibly out there today,
KM

Long ETFs

GLD -SPDR Gold Shares –LME Gold spot prices declined by as much as 0.8% in trading today, reaching $778.07 per ounce.

OIL iPath ETN Crude Oil –Light Sweet Crude futures fell as low as $45.30 this morning, testing the lowest level since early 2005, with EIA crude stock levels showing a declining of almost 500k barrels last week.

EWG – iShares Germany  -- The DAX Index rose 1.6 % to 4,638.43 in trading today.  Verband der Chemischen Industrie, a trade association that includes BASF (EWG: 4.6%) and Bayer (EWG: 6.0%) guided down for production and sales by the chemical sector as a whole for 2009.

EWH – iShares Hong Kong – The Hang Seng dropped 0.6 % to close at 13,509.78.

FXI –iShares China – Baosteel -China’s largest steelmaker, commented on “drastic shrinkage” of sales to Automotive sector in H2.

 Short ETFs

IFN iShares India –
Yields on India’s benchmark 10-year government bonds have dropped 30 basis points to 6.79% after India’s inflation rate unexpectedly fell to a seven-month low. The benchmark Sensitive Index rose 2.7% to 8987.47. Wholesale prices rose 8.40% in the week to Nov. 22 from a year earlier.

EWU – iShares United Kingdom – The pound fell versus the dollar to an all-time 6-year low. Home value declined 2.6% from October. Prices fell 16.1% from a year earlier.

UUP – U.S. Dollar Index –The Euro declined to $1.26 USD and 117.05 yen on speculation the ECB will cut interest rates by half a percentage point today from 3.25%.

EWJ – iShares Japan –The Nikkei 225 closed down 1% to 7,924 today. Japanese stocks fell partially because of speculation that US carmakers will enter bankruptcy.

FXY – CurrencyShares Japanese Yen Trust – The yen declined to 92.73 USD in trading this morning.