MCM Macro Weekend Strategy, 1/6/08... 'Real Hedge Funds Hedge'

If you really want to annoy the mentally inflexible, levered-long and/or concentrated hedge fund managers in this business, remind them how right you were in making a "macro" market call on the bearish side, and then ask them why they didnt see it coming...

The most recent edition of the Hedge Fund game has become very peculiar that way; it's really the only game i know where losing is met with relative performance justifications. On Monday, the internal dialogue at most US hedge funds will go something like this: 'but we're only down a couple percent... 'hearing another guy is getting wrecked, though'...'have you heard anyone else's numbers?'... 'how's Stevie doing - hearing he's upset'... 'did you call the CFO yet? what's going on in this stock'... 'this stock is just too cheap here'...

Now, imagine if real athletes (the only other professionals i can find with the same performance-based compensation packages) behaved this way. What if Pittsburgh Steeler's quarterback, Ben Roethlisberger, went back to the dressing room after last night's 31-29 playoff loss to Jacksonville last night and whispered to the guy next to him 'but the Redskins lost to the Seahawks by more'... or, worse, 'those interceptions i threw don't matter; i have my contract guarantee'...??

The only guarantee i have for you is that if this bearish market action persists, the US Hedge Fund business will prove to be as dangerously cyclical as the US Economy, and the US Banking system have, alike.

January 2008 to date: Dow (3.50%); SP500 (3.86%); Nasdaq (5.57%); Russell 2000 (5.80%)

This was the worst 3-day start for the US market since 1932. Both the SP500 and Russell 2000 are now well off their October 2007 "Its Global This Time" highs - down 9.8% and down 14.7% , respectively. It might surprise you if i told you how many people in the business are all of a sudden calling and emailing me again, asking me for my opinion on what's next. Yes, that consensus negative sentiment shift is a bullish sign...

In the last three months, i've round-tripped the #1 criticism from both my hockey and investment careers - "he's too short"!

Hindsight is always crystal clear, and i think we are on to something here in fundamentally believing that the un-winding of long term macro cycles are processes, not points. Inflation plummeted from +13.6% in 1980 to +1.1% in 2004. Interest Rates on 10yr US Treasuries dropped from a 1981 high of approximately 16% to a low of 3% by 2003. And, most importantly, as a result of inflation going away and cost of capital doing the same, the Dow Jones went from 776 in 1982 to 14,164 in October of 2007 - yes, that's a +1,725% gain!

Therefore, my answer to all of the questions i'm getting surrounding where we go next remains quite simple - "they are too long"!

The MCM Trend (intermediate term) for the US Market remains negative - until the basic construct of hedge fund risk management changes, and PMs start asking themselves 'where do i stop selling?' versus the standard bull market preface of 'where do i cover them?; where do i buy them?', i think we continue to make lower highs on market bounces. To that end, technical resistance has developed around the SP500 1471 line.

The MCM Trade (immediate term) is going to be moved to the positive side - this is largely a call to cover oversold shorts and lock in gains. As you saw, i started doing this late in the week. I am probably early, but realizing gains on shorts we put out in early November is very profitable here. In terms of downside support, if the SP500 breaks the August 2007 low of 1406, the March 5, 2007 SP500 low of 1374 is as good as any technical reference point i see.
That's another 2-3% max downside from Friday's close.

Remember, real hedge funds hedge.

Have a great week,
KM
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MCM Themes
Fed Centric/Fed Cut bull case is the Tree; Access to Credit/Capital the Forest... -Nov07' Rebalancing to the Left; look for Socialism to regain her footing, Globally, in 2008... -Nov07' Bonds, Banks, and Bailouts; Blue Magic is bad, in the end... -November 07
''US$ Bottoming is a Process, not a Point' -November07'
'YouTubing America' - Transparency/Accountability will transform Washington to Wall Street -Dec08 '
Paulson & the Fed Centrists want you to call 1-888-995-HOPE' -Dec08'
'The Double Edged Fear Sword: Fear is now the dominating market factor, not Credit - Fear for Fed Centric Bulls & Consensus Bears alike'-Dec08'
'Global Basic Food Consumption Growth will takeover from the consensus "Its Global this time" Industrial Production Growth story in 2008'-Dec08'
'Litigations & Redemptions' - The Tide has rolled out on the Levered Long Community'-Dec08' _________________________________________________________________
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 whatsoever for any losses estimated to be attributable 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.