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Monday Morning Quarterback

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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.

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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.

R.P.

Positions in metals, energy, financials

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 todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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