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Monday Morning Quarterback


On the heels of a week that saw a slew of bad news, we power up our frisky pup to see which bark has bite.


So put me on a highway
And show me a sign
And take it to the limit one more time
(The Eagles)

Good morning and welcome back to the flickering pack. On the heels of a week that saw a slew of bad news, we power up our frisky pup to see which bark has bite. There are indeed causes for concern, at least when juxtaposed against the prevalent Goldilocks mindset. Subprime lending woes are upon us, further proof points have emerged in the housing unwind and, perhaps most importantly, there were signs of sneezage from China and India, the gorillas that drive global growth.

While traders chewed on the ursine fodder, the weekly price action simply bruised the market body and pushed away potential blemishes (such as acne in the banks above BKX 119). That left a pensive crowd to sort through the two-sided tape and determine whether this is a "healthy and expected" correction or the start of some meatier downside mojo.

Minyan Michael Santoli noted in his always excellent Barron's missive several widely circulated musings of this "strong yet stretched" tape. Stocks are up eight straight months, there's been 144 consecutive sessions without a 2% down day, we've had 17 straight quarters of double digit earnings and more than 50% of all S&P stocks are within 5% of their 52-week highs. All true, all worthy of attribution and all indicative that our bear Boo will eventually get his due.

On the other side of that trade, the bovine will kindly remind us that the reaction to news is more important than the news itself. Between HSBC and New Century Financial, 13 new stock offerings and a $39 billion LBO, global equities had ample cause to pause. Yet, in the face of disgrace, Hoofy held his ground and, in the process, toed the S&P trendline that's been in place since August. That, along with BXK 119, remains an important technical toggle as we fit together the upcoming pieces.

Some further dew to chew on as we figure it all out…

  • If China and India (chatter of heat exhaustion) indeed sneeze, the devil we don't know, a.k.a. the Phantom, may rock the opera as he did last Spring. Keep an eye on those beasts, Minyans, as they influence the stateside dynamic.

  • Is a conflict with Iran inevitable? It feels that way as evidence mounts and rhetoric circulates that they've already been players in our war with Iraq.

  • The above two bullets are effectively the macro bear and bull cases for metals and energy sectors.

  • Fortress Investment Group (FIG) gotta lotta weekend press after the stock rose 68% in the first day of trading and the five partners pocket $10 billion. I commented on this offering (from an investment perspective) on Friday's Buzz but I wanted to offer another thought that's been ruminating in my crowded keppe. What if public hedge funds are the last bastion of the liquidity bubble? While there are substantial risks, I can't help but wonder if this "trend" will line the buy side coffers with a fresh slew of funds that they can, in turn, leverage into buy side ammo?

  • It's a "holiday" expiration week, Minyans, so expect some unforeseen crosscurrents midweek (in front of the actual expiry) along with thinning liquidity Friday. And remember, the onus is on us to proactively position for what's to come.

  • Big Ben will take the hill on Wednesday and I'm already hearing some Elmer-esque anticipation. I continue to feel that Justin Timberlake hit the nail on the head with his "Fed in the Box."

  • I'm a big believer in the "energy and metals over high multiple tech and financials" theme. With that said, and from a trading perspective, I further lightened my holdings on the back of the 'softer than expected growth chatter' from China. I still own what I would describe as "bare bones cores" and will look to nibble anew into anticipated softness. So ya know...

  • Top line tells remain the financials (BKX 119 and GS), homies (reaction to news/consumer extrapolation), the semis and nets (for tech), the dollar (contra-tell), emerging markets and YOU (know thyself).

Good luck today.


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Positions in metals, energy, financials
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