Pops and Weasels
Europe is gettin jiggy with it!
Good morning and welcome back to the gobble hobble. Last week's whip was a wild trip filled with upside snaps and downside dips. By the time we were done having our fun, critters everywhere were on the run. Is this the beginning of the upside trimming or will Hoofy just shrug and continue his winning? It's Thanksgiving week for the minxy freak so listen up close as the tea leaves speak.
After eight months of shrugs and squeezy bear hugs, the bulls took a pause and their bold bids got plugged. The damage was slight (much to Hoofy's delight) but Boo opened wounds and shed some new light. "This backdrop of slop has been here all along," said Boo with a smile (although he's been wrong), " but it never matters--until it does--and that, my good friends, is why there's now buzz." He's got a point as the agita grows but let's take a look at how this wind may now blow.
We've been speaking about the grizzly backdrop for a while and, as the Minx powered higher, that's been a lesson in both frustration and futility. The zillion dollar question (and our answer to future profitability) is WHEN these issues will prick the psychology bubble. Higher prices have (thus far) led to a conditioned rationalization and the massive complacency, dollar meltage, crowded bull camp, unrealistic valuations, geopolitical risks and newfound bubble troubles have been a "bad read." There are always two sides to every market (and trade) and, as we know, the only right answer is the one that is circled on the bottom line.
After a few weeks of consolidation (and the S&P and BKX 50-days holding support), the expectations for a Snapper are pervasive. Heck, even the bears are expecting a lift such that they can gauge the zest of the upside retest (and look for the fabled "failed rally"). Every time the bears have gotten a tingle, the herd was spurred and the outcome was single. Why might this juncture be any different?
Well, for starters, last week introduced new elements into the macro mix. Inflows to dollar based assets totaled a paltry $4.2 billion in September (vs. an average of $64 billion average the first eight months of the year). That, along with the China trade tensions, put some meat on the macro bone and offered tangible (although known) concerns. With the account deficit in the first half of 2003 the highest ever (5.1% of GDP), total debt upwards of 350% of GDP and the dollar tickling all-time lows vs. the Euro (and multiyear lows vs. other major currencies), stocks, as a monolithic asset class, are now longer immune en masse. They've surely been resilient but it remains to be seen if their glass chin can handle more global jabs.
If the dollar continues to fall (which, after an overdue counter-trend bounce, I expect it will), there will come a point when foreigners will need to be compensated for assuming the risk of dollar denominated assets. More likely than not, that carrot will come in the way of higher interest rates and when that happens, our fragile stimulus induced recovery attempt will likely get thwacked with an ugly stick. The rate (and swiftness) of that rebalancing--when it comes--will have profound implications for both equities and bonds. As Stephen Roach (Morgan Stanley's talented economist) notes, the dollar is a faith based currency. How that faith evolves (dissolves?) over the coming months (and years) will likely dictate our stateside fortunes.
Turning our attention to today's fray, we awake to find a peppy Europe (up 1-2%), a flat jinx, a bouncing baby greenback and generally optimistic traders. Post-expiration posturing will continue through the better part of the session but, for the most part, stocks will focus on the technical and psychological metrics. S&P 1035-1047ish is a range to watch as is NDX 1390 (50-day)-1400 (November breakdown). Key tells will once again include the piggies (led by Citigroup (C:NYSE)), the semis and semicaps (Intel (INTC:NASD), Applied Materials (AMAT:NASD)), breadth and the dollar. Again, most everyone I've spoken to expects a decent rally--let's see if the Minx has the moxie to motor.
Good luck today.
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