Nobody likes a chauvinist critter!
Good morning and welcome back to the front lines. Late last night, at a secret location somewhere on the outskirts of Minyanville, the critters (sans Daisy) gathered for an unannounced and classified chapter meeting. As they huddled around a small, warm fire, they spoke in hushed tones about the market, the world and the coming catalysts. A transcript of this meeting appears below but read quickly--it will self-destruct in five minutes.
Hoofy: Alright brother Sammy, what's so urgent that it couldn't wait until tomorrow morning? I was knee deep in dairy product when you called and was about to make a serious milk shake!
Sammy: Brother Boo actually asked me to call the meeting as he wanted to discuss some delicate thoughts off the record. He didn't know if everyone would attend if he actually called it himself--you know, with the lack of respect he's been getting lately.
Snapper: (rolling his eyes) Brother Boo, what weighs on that critter conscience now?
Boo: (sighs) I know that more than 100 members of the S&P 500 are reporting earnings this week and that's clearly the focus of the investing public. Between the technicals (S&P 1050) and the fundies (watch for end demand), everyone's trading radars will be packed to the peak. I want to discuss something else, though--something that is taboo in a lot of circles. I want to discuss the nightmare that is Iraq.
Hoofy: THIS is why you called an emergency chapter meeting? You want to talk about the Middle East? Now? Right in the face of the busiest reporting season of the quarter? Dude! Do me a favor and double your dosage of Xanax because you've officially spilled your marbles.
Sammy: Brother Hoofy, you know the rules...any member of the fraternal order can bring a motion to the floor at any time. Here him out, please. (turning to Boo) And young bear, please remember that this isn't a political forum--it's an educational community predicated on the financial markets--so keep your opinions relevant.
Boo: (scanning the faces of his friends) OK, there are plenty of charged emotions regarding the efforts in Iraq and a lot of people are confusing patriotism with blind support of the war. Forget, for a moment, that this has the potential to turn into a new age Vietnam--my point isn't to stir a debate as to our role over there. Rather, I am concerned about the financial implications of the effort. Initially, as we've seen over the past quarters, government spending buoyed corporate America by generating a slew of new business demand. My fear is that we're taking two dollars from the left pocket to put one dollar in the right pocket and, eventually, that's gonna come back to haunt our economy, the deficit and the greenback.
Hoofy: Again, I have to ask the question. Who cares right now? It's earnings season! Can I please go home now? I have a cow to lick! (get it....cowlick?)
Boo: Brother Hoofy, hear me out. You know you've earned my respect this year by fending off the imminent and unavoidable fate of the tape. And again, my goal isn't to get into a long-winded discussion of whether we should be there in the first place--the right to have an individual opinion is granted in the Constitution. But when we're dropping almost $4 billion a month and the wrangling continues in the U.N as to who, if anybody, will help assume the financial burden, it should remain on our radar--especially with the resolutions passing back and forth on the floor this week.
Sammy: So, if I'm understanding you Brother Boo, you're simply reminding Brother Hoofy that earnings aren't the only potential catalyst in our midst?
Boo: Sorta. Earnings are clearly the most important metric right now and they'll dictate the near-term price action. The ultimate downside catalyst, in my humble opinion, won't be so obvious. More likely, it'll stem from a pin prick of the psychology bubble that will lead to an eventual confidence crisis. I don't think it'll be caused by a failure to pass a U.N resolution--something will come together shortly--but as the reality of the Iraqi black hole sinks in and Dubya's approval ratings sink, the collective focus will shift to the deficit, dollar and dire straits. The hallmarks are there--crowded bull camp, low volatility, zero concern and widespread complacency. What's more, the mere mention of these historical guides draws giggles from the bulls who have already determined, in their minds, that they don't matter anymore.
Hoofy: They may matter, Brother Boo, but I don't think they'll matter this week. The market is acting just as I would like into earnings (basing with beautiful breadth) and the stair-step remains in tact. I hear what you're saying--trust me--but I just don't think you're gonna get the bad news you're looking for in this reporting season. But hey, I'm a bull and, by definition, I get paid to be optimistic.
Boo: Do what you will, Brother Hoofy, but just remember that bear market rallies always end on good news. The knee jerk reaction (to earnings) may very well spurt the Minx through the all-important S&P 1050 level which, as you know, will damage the bear case (by negating the broadening top). It by no means changes the fragile backdrop, however, and that is the point that I'm trying to get across. Personally, I'd prefer to see some kind of blow-off top (Wednesday or Thursday) that (temporarily) takes out S&P 1050 but, hey, I haven't gotten what I want all year so beggers can't be choosers.
The critters stood there for a moment and listened to the sound of crickets fill the nighttime air. It was rather peaceful, they thought, and they wanted to make sure that they took the time to enjoy the serenity. They knew that in a few short hours, corporate America would begin their state of the union and the shvitz would hit the fan. They embraced, gave each other the secret fraternal handshake, and disappeared into the deep woods. The meeting was adjourned...but the games had only just begun.
Good luck today.
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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