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Fort Knocks


Alright, Toddo---we get it!!!


Well he started with a bank in Colorado
In the pocket of his vest a Colt he hid
And his age and his size took the teller by surprise
And the word spread of Billy the Kid

(Billy Joel)

Good morning and welcome to the scorning. Hump Day is here and so are the Sox as we ready to steady the school of hard knocks. It's been a tough week for the bulls who had bet that the big picture blues wouldn't come quite just yet. "We know some potholes have littered the road," said Hoofy the bull from his humble abode, "but I really felt I could shoulder the load and stop the quick drop from a full-fledged sell mode." Can the bulls pull the wool over young Boo's brown eyes or will he come undone by an ursine surprise? It's minxy, it's moxie, it's sure to soon thrill so strap on that lid as we romp through the 'Ville.

JP Morgan (JPM:NYSE) reported this morning and missed both sides of the earnings lines. While the defense team will object that we're witnessing simple integration pain (with Bank One), the timing is unfortunate for the Matador crowd. While we've been discussing the smoke in this poke for quite some time, the smell has been a bit more pungent of late. And as the financials are the sail that drives our minxy ship, I wanted to spend some time with the reasons and rhymes.

I've traded this complex for 14 years and have always had an affinity for the piggies. I began my career at Morgan Stanley and built the banking sector "book" while on the derivative desk. Nobody was focused on these names and it was my opportunity to establish myself as a producer for the firm. During my tenure, I had my fair share of wins (Chemical / Chase) and losses (First Interstate) but learned a ton about how these names trade. It became my passion and, as you know, we never forget our first love.

When I jumped to the hedge fund community, I remained active in these names and traded them from the long side during the consolidation mania in the late '90's. As we edged through 2000, however, I got very aggressive on the short side and nailed some pretty meaty trades. I continued to wax and wane through pleasure and pain as the "future" began to crystallize in my crowded keppe. "Too many negatives," I thought, "and this is not going to end pretty."

As old school Minyans can attest, I'm typically early with my trading vibes. Unfortunately for me, I entered 2003 negative on the group and was quickly administered an equity enema from none other than Elmer himself. While I knew that a coordinated agenda existed, I didn't fully respect the power of (dollar) publication. And just as I openly opined that the brokers would one day be teens, I got blindsided by the bulls.

I remember with great clarity when I was on Squawk Box during the summer of 2003 and maintained my bearish stance, citing Fannie Mae (FNM:NYSE), debt and derivatives as the ugly elephants that nobody wanted to see. It wasn't a popular posture--particularly in the midst of a rally--but it was how I felt and, if nothing else, I'll always be honest. As lots of those stocks are at the same levels now as they were then, the obvious question is begged: does it finally matter?

Brian Reynolds has written some brilliant columns of late and I've learned to respect what I get directly from the Horse's mouth. He's monitoring the corporate side of the equation and--as it stands--the bulls still seem brave. The reason that my interest has recently piqued is due to the steady steam of an ursine theme. Aunt Fannie (FNM:NYSE) has finally arrived in the spotlight, Citigroup (C:NYSE) is globally soiled, Marsh Muck (MMC:NYSE) is a house of pain, underfunded pensions are causing strain and the entire industry is under regulatory scrutiny.

That would be worthy of a nose scrunch in and of itself but the fundamentals are equally concerning. The overcapacity in the industry will ultimately manifest via tighter spreads, reduced underwriting revenues and muted volume (as the hedgies get weeded out). Further, a maze of derivatives intertwines these institutions and while that's not the cause of the problem, it is certainly a cause for concern. With outsized leverage and increased compression in the marketplace, a simple sneeze can turn into a contagious cold awfully fast.

The offset? In a word: liquidity. That's what drove these stocks in 2003 and it's what has buoyed them thus far this year. The spigots at the Fed are not without recourse but they've managed the musical chairs to date. The troubling yet effective trio of fiscal stimuli, monetary policy and incessant jawboning has given the drunk skunk a shot in the arm and it's difficult to tell if it's now time to sober up. I don't mean to pee in the punch bowl, my friends, I simply don't wanna see ye faithful at the party when the lights finally flicker on.

If you run face first into a brick wall, chances are that you'll eventually stop hurting yourself. That's the prevalent mindset in Red Dye as the bears have gotten roasted each time they've pressed their bet. And while I don't know if this time will in fact be different, apathetic rationalization is typically a bad sign. My point today isn't to scare you or suggest you bet your hard earned coin. Rather, I want to make certain that you see the landscape. For by the time it hits the general press, chances are it'll be too late.

Good luck today.

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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

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