Tuesday, December 4, 2007

Positioning Ahead of the Fed

As always a tricky time approaches; the one thing I hate more than anything are bipolar events in which the market can rise 5% or fall 5% all based on perception of an event or words. So each Fed meeting in times like this (versus says 2005 when Fed meetings were sleepy affairs) is such an event.

We have a jobs report Friday and a conspiracy theorist would say it will be bad. Why? Because when the Fed needed an excuse to cut discount and fed funds rate by 50 basis points in mid August, the Friday before the meeting the jobs number came in NEGATIVE. How convenient. Why do I say that? Because that number was revised up 80,000 within 30 days when the government suddenly "found" 65K government jobs.... hidden in a sock drawer.

Why anyone pays attention to these numbers that are subject to revisions of magnitude of 50% is beyond me, but thats the game we play and we have to follow the market rules, and animal spirits. Whatever the case I believe 25 basis point cut will be greeted with a yawn. So I would not be surprised for yet another 'shock to the system' (remember they were saying 5 weeks ago, no need for cuts for now blah blah blah) and the potential for 50 basis points. And of course the market will cheer, rally, high five blah blah, until realization hits again on why we need such drastic efforts. When that happens, and how it plays out who knows.

Either way, it is a guessing game and the small investor has no advantage. So going into this Friday's job report I will be going to more of a cash position, reducing the short exposure because in a blink of an eye the market could 'rejoice' bad news and be up 3% (or down). Remember, bad news is good news - the worse the news, the more we can clap like seals for the Fed cuts. So we have a week ahead of us now where the debate will be "how bad of news do we prefer/want". Again, this would be laughable to main street, who never wants to see such bad news, but on Wall Street its a perverse game. Certainly we can be in a time where bad news is 'great news' because Fed cuts 'solve everything'. Hence raising cash and letting the market decide if they are happy about bad news and sort it all out without a 100% exposure one way or the other is the way to go. Since I've liquidating on the long side as far as I want to go (sub 70% long exposure), if we get some weakness in the next few days I will probably start cutting back some short ETF exposure and simply let funds sit in cash (around 20% currently) until next Wednesday afternoon when the "jury" decides if Uncle Ben did enough to make it happy.

We continue to trade below key technical levels and the old 'leadership' - Apple, Google, and oil stocks are not doing well. This would point to a negative outcome, but one could always argue the market loves to climb a wall of worry and the Fed can solve everything. I will let the market make up its mind and then go from there. I have a big lead on the market since fund inception on August 3rd, so unlike the institutions scrambling to increase performance before year end, I can remain patient and pick spots.

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