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Pangs of the Past


Anyone got a broom?


Good morning and welcome back to the frosty track. The Minyanville streets are covered in snow as we ready ourselves for a minxy new show. Tensions are high as we shake off the chill for a long five day set that is likely to thrill. "We hammered the bulls and have them confused," said Boo to his crew of the recent stock blues, "despite the hard right that left them all bruised, they're still hangin' on to their once upbeat views." Will week four be the charm that reverses the harm or will further declines finally sound an alarm? We'll know soon enough as we shake off the jitters and roll up our sleeves in the city of critters!

It seems like yesterday that "merger mania" and "seasonal tendencies" had set the stage for some giddy stock rage. And why not? Once the great range of 2004 broke out through S&P 1160, reactive rationalization and performance anxiety combined to forge a powerful upside path. As price is the ultimate arbiter and an emboldener of predictive prowess, the few feeble furry whispers got drowned out in the celebratory sea of perceived guarantee. Three weeks of spanked cheeks later, however, the Matador Crowd isn't feeling as proud.

In hindsight, it's easy to assign reason for the Red Dye rhyme. Week one was a collective "offsides" in the hedge fund community as '04 agendas morphed into '05 positioning. Despite the fright, the dip shtick doubled down as they attempted to trade immediate gratification for patient profits. After high profile slips at General Motors (GM), JP Morgan (JPM), eBay (EBAY), Delta Air (DAL), United Parcel Service (UPS) and Fannie (FNM) emerged, the action--coupled with some of the worst internal readings in recent memory--has pushed a few professionals a bit closer to the edge of their seats.

While the big picture is made up of all these little pictures, we must also ask ourselves if a seismic shift is underfoot. Global central banks, led by our fearless Fed, made a historic effort to reflate the world with hopes that a legitimate self-sustaining recovery would unfold. Between fiscal and monetary stimuli, negative real rates and incessant assurances, it was easy to forget that the imbalances and capacity resulting from the bubble needed more bed rest and less adrenalin. Now we've got a doped up patient and an anxious doctor, neither of which seems to truly trust the other.

Perhaps 2005, thus far, is an attempt to see if the persistent prognosis can survive without the liquidity life-support. We're stuck between a rock (stagflation) and a hard place (deflation) as Elmer fiddles with the monetary spigots. We've seen the effects of the former as (pick an) asset class rose, the dollar lost 30% of its value and consumers, corporations and government all leveraged themselves with cheap money. Maybe the timing of the January FOMC minutes was a coincidence but the now slinking money supply, flattening yield curve, steadiness in the dollar and pfffft! across the board (equities, metals, Brazil, et al.) is curious in the least.

The subjective psychology will be the wild card as a disconnect remains between perception and reality. That fact is magnified by the geopolitical complacency in front of the Iraqi elections and on the heels of assurances that the fight for freedom knows no borders. With volatility levels hovering near all-time lows and sentiment significantly skewed, the risk in this arena remains to the downside. Yes, some shorter-term measures are indicative of a bounce but we're talking overall tape here. The kind of stuff that will be obvious in hindsight and redundant in nature.

We power up this session to find the S&P (dandruff/'04 acne), Dow Jones (10-4) and BKX (100) all sitting on or near pivotal points. That, coupled with an agenda to win a week in January, will be the bovine battle cry as they dig themselves in. There will be a ton of earnings hitting the wires this week along with bevy of Beeks to keep us honest. Please watch the breadth for guidance and remember that discipline starts within. Trade smart, think positive and let's make a few shekels this week.

Good luck today.

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