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Of Hawks and Doves


...this may very well be the juncture where the falcon meets the snowman.

"The moment you accepted money, you became professionals. It's just beginning."
KGB agent, The Falcon and the Snowman

There's an old saying that by the time you get to where you want to be, the journey will have already ended. For many market players, that realization has only just begun.

With the Big Ben and the FOMC ready to take center stage, the collective focus will again shift to the rate outlook and policy directive. It's a delicate dance to be sure, with inflation apparent in things we need (energy, healthcare and education) and deflation emerging in things we want (cell phones, laptops, plasmas).

Indeed, the next time Justin Timberlake appears on Saturday Night Live, his musical parody may well be called The Fed in a Box.

I wrote a column in November that offered why the US central bank remained skewed towards the tightening camp. And, as we ready to steady our gaze towards the prepared text, my sense is that the inferred bias will remain much the same. The world is denominated in dollars. Holders of those securities are growing impatient with muted absolute gains. We have, in many ways, exported our financial independence.

So what does that mean for the journey? In the near-term, it likely means a stronger dollar and pressure on commodities.

I have been--and remain--a big picture bull in the energy, metal and agricultural complexes. If I have to own sectors or stocks, I want them to be centered in arenas that feed, educate and power the world. Ergo, I want to avoid crowded and competitive sectors, such as the financials and high multiple tech, that supply and finance things we "want."

There is a huge difference between commodities and commoditized products. It's called pricing power and profit margins.

How you approach the market is particular to your stylistic approach and risk parameters. Active risk managers may choose to "pair" this exposure (long the former, short the latter) while investors may simply opt to weight their portfolios as a function of time horizon.

The conundrum we collectively face is that, like it or not, the US is dependent on China and India for global growth. If either of these two gorillas sneeze, that's when The Phantom of Deflation will arrive. Globalization--and its evil twin, Nationalization--are the continual undercurrents that shape the global tide. It's not actionable, per se, but it's inevitable and omnipresent. And it's most certainly in the back of Ben Bernanke's mind.

For my part and with my money, I approach the market through two distinct lenses. I've got the trading bucket of my book, where I attempt to capture trends, phases and nuances, and I've got a longer-term component, where I want to position to capture secular trends. I've effectively pared my short-term exposure but want to use downside disconnects, if and when they arrive, to add to core holdings such as Goldenstar (GSS), Weatherford (WFT), SunMicro (SUNW)--my one tech exception--and ITT Corp (ITT), which is a "water play" in drag.

Finally, while I have you, I wanna offer two thoughts that I believe will greatly enhance our probabilities of profitability. First, the ability not to trade is as important as trading ability, so be mindful that the landscape is ripe with desperate hedgies who get paid to play.

Second, be conscious of the potential uptick in volatility, as evidenced by last week's one day, 20% spike in the VXO (volatility index). The trading community has been conditioned to play for dimes rather than dollars. That compression will unwind and when it does, it'll catch alotta folks outsized relative to their comfort zone.

In short, this may very well be the juncture where the falcon meets the snowman. The question we must ask ourselves is: who will blink first?
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positions in energy, metals, financials, GSS, WFT, SUNW, ITT
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