MCM Macro Weekend Strategy 12/9/07

If you are looking to reconcile how i can be so fundamentally concerned, yet so bullishly positioned...

As far as the laws of mathematics refer to reality, they are not certain; and as far as they are certain, they do not refer to reality.-Albert Einstein

I stayed with last weekend's MCM Weekend Strategy game plan; when the S&P 500 broke out through my 1489 level on thursday, i moved to 59.7% net long. After locking down some gains on the long side (selling names like Harley Davidson (HOG), that moved where i thought it might in 6 months, in 6 days!), i closed out the week 37% net long.

In US trading this week, the MCM Trend joined the MCM Trade, moving to the upside:

Week of December 3, 2007 = Dow +1.90%, S&P +1.59%, Nasdaq +1.70%, Russell 2000 +2.31%. YTD 2007 = Dow +9.33%; S&P +6.09%; Nasdaq +12.04%,Russell 2000 -(0.27%

On the cover of your weekend Barron's: "The Dow rallies 2% as recession fears ebb"... and the "Fear" i see out there is as relevant to a "Momentum" Portfolio Manager/Fed Centrist scared of missing the next trading move higher, as it is for the "Fundamental" Portfolio Manager/Consensus Bear scared of his short positions squeezing him further...

Fear is the dominanting factor right now, not Credit. Fear for the bulls and Fear for the bears. When the bull/bear camps move in tandem, and my MCM Trade & MCM Trend are pointing up/down in tandem, you'll see me open my exposure sails. Thats what i did this week. Thats not my religion, thats just my investment process.

MCM Trade = UP: Remains in positive territory, but clearly overbought on Fridays open. I sold into the squeeze, taking my net exposure down (Immediate Term)

MCM Trend = UP: What was technical resistance, now becomes support for the Bulls... the burden of proof moves to the Bears; Fear is factor #1, M&A factor #2... "Credit" is numbing now. (Intermediate Term)

MCM Themes: The 'US$ Bottoming is a Process, not a Point' ...-Nov07' call is working, but continues to concern me... Bernanke's decision on Tuesday will likely give me some clarity on where to move from here. _________________________________________________________________________________________________________________________________________________________ MCM Strategy Considerations, post Fridays market close...

Whether you care to attempt to understand (or trade for) daily/weekly market performance or not, odds are you were equally surprised to see this US Market rally so expeditiously in the last few weeks. From the November 26th closing low of 1407, to the aformentioned Double Edged Fear Sword that stabbed 1510 in a classic gap up "buy & cover!" open for the S&P 500 by 9:46am EST on December 7th, there was a big +7.3% MCM Macro market move to be taken advantage of.

Post the bullish November US Employment Report, Fed Cut odds dropped, big... This doesnt surprise me at all - this is in line with what i called for in my friday MCM Macro Morning note. I didnt think Bernanke would do 50 bps, and i still dont. However, i'm an aspiring scribe, not a soothsayer... anything is possible here. Even though consensus moved closer to me by Friday's closing bell, the Fed Centrists are still alive here... they've moved their odds down from where they were peaking (48% odds on Tuesday), to 24% odds for 50 more basis points of the 'Blue Magic" bailout cuts on December 11th. Larry Kudlow has the rally cap on, cheering for 100bps, and his Reaganite buddy Art Laffer is on the record looking for 150 additional basis points of cuts!

Macro economic sentiment isnt toxic yet, but post November's market swan dive its been getting pretty bad; and thats been a bullish factor for stocks, thats helped me get longer. Implied Equity yields continue to be impressively higher than Bond Yields as well. US 10 yr bond yields have been smashed - down 140bps in the last 6 months, ticking <>Bear Consensus: As Tony Crescenzi of Miller Tabak pointed out earlier this week, the "short base, as defined by the collective position held by non-commercial traders, in S&P 500 E-Mini contracts was at its highest on Tuesday (December 4th) since the week ended Sept. 18, a day before equities catapulted"...

December has been a lesson in Behavioral Economics 101 - consensus concern, quantified by Crescenzi's #'s on Tuesday, gave birth to another baby Bull!

The power of this Double Edged Sword of Fear - the Consensus Bears having to cover, at the same time as the Fed Centric Bulls reload their buy order guns is as relevant a day to day US market trading factor here in December as anything i see right now... Respect it, and be mentally flexible enough to understand it.

As always, where do we go from here?, is THE only question that matters. On a daily trading basis, I think any economic or company data that plays out counter to the Consensus Bear scenario (ie no Recession) will do two things:

1. put Bernanke and the Fed Centrists in a box, and the market at risk to the downside; without the "Blue Magic" cuts, what will the Bulls do?

2. will create massive squeezes in selective stocks - specifically where the consensus "macro" short bets were pressed at the November market lows - you saw this dynamic emerge this week in the Financials and Consumer stocks, selectively... some of these consensus hedge fund short positions are like balloons being held under water, waiting to explode to the upside on any remotely better than bad news

Yes, those two points are potentially positive and negative... and yes, thats a two sided answer to THE question - but i checked the market rules book, and thats allowed...

So what am i suggesting you do?

1. Take down gross exposure to all positions; lock in gains on the long side, and cover shorts where you have no research edge
2. Be patient, objective, and emotionless ...
3. Have some egg nog at night, and relax... you'll need the energy for January!

Good Luck this week,
KM

MCM Disclosure/Disclaimer: This email and/or blog is for a select group of my friends, and represents a beta test of an idea that i am incubating. My email and blog writings are prepared without regard to the unique circumstances or goals of those who read them. They do not provide investment advice that should be specifically acted upon without considering the all encompassing range of investment information and/or considerations available in the public domain and/or without considering all appropriate professional advice. This should not be considered a solicitation to buy or sell any security or to participate in any investment strategy. The information and editorials in these writings are not necessarily complete or perfectly accurate and are not guaranteed by Keith McCullough or MCM. This information is protected from disclosure and constitute opinions only as of the date of their issuance. Opinions are subject to change without notice, and Keith McCullough or MCM do not accept any liability whatseoever for any losses estimated to be atttributable to any use of this content. Keith McCullough and/or McCullough Capital Management, Inc. likely owns and/or is currently trading in all of the securities cited in these emails and/or blogs.