“The essence of football is blocking, tackling, and execution based on timing, rhythm and deception.” --Knute Rockne
Good morning and welcome back to the flickering pack. Following a freaky week of Fed technique, we file onto the field for the final fortnight of the year.
2007 has been a gridiron battle and the Bulls are looking to run out the clock given the inclement weather and hostile crowds. Coach Bernanke and Offensive Coordinator Hank Paulson, after calling aggressive interest-rate audibles and liquidity routes, have an eye on the ticker as the teams take the field.
While their creative approach has been enough to keep the hungry Bear blitz at bay, the pocket protection seems to be suffering. It feels like momentum has shifted, although hope springs eternal at Bovine Stadium. They’re not used to losing, mind you, and they won’t react kindly if they do.
As we ready ourselves for final drive of 2007, I thought it might be helpful to white board our four primary metrics. We practiced this play as we readied for the fourth quarter and it has thus far proven profitable. Quite hopefully, this exercise will provide equal utility.
Following last week’s offside exhalation, the S&P remains in a distinct pattern of lower highs and lower lows. Further to that, we’re back below the all-important S&P 1490 level, as well as the 50- and 200-day moving averages.
BKX 90ish is multi-year support dating back to 2002 and it’s where we closed on Friday. Hold, and Hoofy has a shot at shifting the path of maximum frustration back through
City. Fold, and it’s time to put the women and children to sleep and go looking for dinner.
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Of equal note is the dandruff that seems to be flaking across the equity hairline. The S&P, DJIA and, with some creative license, the NDX are all tracing out what appears to be (negative) head and shoulder formations.
Finally, taking a gander at other asset classes, most notably crude and metal equities (XAU), and you’ll find still more dandruff. Why, you ask, does that matter? Financial asset classes have traded monolithically, all for one and one for all, on the other side of the dollar. And that takes us to our second metric.
We’ve long believed that we’re in an “asset class deflation or dollar devaluation” conundrum. Asset classes have rallied nicely since 2002 but they’ve done so at the expense of the greenback, which is down 36% over the same time horizon. While both the dollar and assets classes could conceivably trade lower, we have a hard time seeing them rally in synch.
One month ago, I scribed vibe about the potential for a rally in the dollar. It seemed far-fetched but the greenback has steadily, albeit begrudgingly, grinded 3% higher since. The world is denominated in dollars and flush with debt. It stands to reason that folks will pay down debt in dollars as the credit bubble bursts.
I don’t view the grabby greenback and asset class dandruff as mutually exclusive endeavors. If, in fact, the dollar continues to rally, asset classes from equities to gold to metals and beyond will likely suffer. Whether it’s a cause or an effect is inconsequential—all that matters is the final score.
There will be relative winners (“stuff” needed to feed, energize and educate the world) and I believe that energy will overtake financials as the top weighting in the S&P. Given the rally we’ve seen in this complex, however, that theory of relativity may provide more advantageous entry levels.
The continuum of any thought process follows the path of denial, migration and panic. I’m reminded of this axiom as the debate continues to rage as to whether we’ll enter into recession. While I’m of the opinion that, for many people, we’re already there (masked by the lower dollar, skewed by the haves), popular perception is likely nestled between the first two trimesters.
To be fair, there is a case to be made that the mainstream mood is sufficiently dour to warrant a surprise rally. The American Association of Individual Investors has triggered signals last seen in March 2000 and May 2002. Still, from where I sit, there seems to be more hope than despair and the latter matter is tough to argue with the indices up nicely for the year.
As credit contagion spreads down the consumer food chain, the other side of zero-percent financing will come home to roost. Auto loans and credit card delinquencies will become front page news as issues once believed to be contained to sub-prime mortgages manifest into a full-blown credit contagion.
The wild card in this scenario, in more ways than one, is central bank agenda. They continue to aggressively pursue policies aimed at keeping the finance-based balls afloat, despite the fact that we’re a stiff wind away from all-time highs. When confidence in the spoken word of the Federal Reserve wanes, the migration of the mainstream mindset will accelerate.
We’ll be getting further fundamental data points this week as corporate tells their tale. Given last week’s news from Bank America (BAC), Washington Mutual (WM) and Citigroup (C), all eyes are on Goldman Sachs (GS) (widely expected to “blow-out” their numbers) and Morgan Stanley (MS) to steady financial sentiment.
Through a wider lens, the question being asked by investors following last week’s PPI was whether corporate would, in fact, pass through their higher costs to consumers. A robust CPI seemed to confirm that this would be the case. That might help margins but it begs the question of end demand and the elasticity of consumer debt.
While one report does not a market make—and year-end agendas abound—I continue to feel that we’ve got inflation in things we need and deflation in things we want. That, coupled with slowing growth, paves the way to stagflation which, while gaining mindshare, is still considered to be a low-probability outcome for the U.S. economy.
I’m not making a massive bet into year-end, choosing instead to choke up on the risk bat and hit for average rather than power. Along those lines, as mentioned real-time on the Buzz, I closed out my trading positions Friday and carry pure “situations” into this new week.
Capital preservation, debt reduction and financial literacy. Those are three themes I want to be long into year-end and throughout what promises to be an interesting 2008.
Good luck Minyans, and let’s go out there and win one for the Gipper!
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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