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Twinkle Toes

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Cabo sounds pretty good to me!

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We've been walking the tightrope, trying to make it right
Walking the tightrope, every day and every night
Walking the tightrope, trying to bring it all around
Walking the tightrope from the lost to found


(Stevie Ray Vaughan)



Good morning and welcome back to Elmer's snack. The big bad event on the radar has passed with Hoofy and Boo both holding steadfast. A thin line was walked by our fearless Fed chief as the market yawned big with a sigh of relief. "The big picture bears were ready to scare," said Hoofy the bull with his usual flair, "but just as they warned of impending despair, Snapper arrived for an end-of-day tear!" Will the bovine opine that everything's fine or is this now a trap set by ursine design? Settle on it with a fresh cup of Jo' as we ready anew for another fine show!

With the macro dance and structural metric all the rage, the critters have been actively debating which way is up. As time horizon is the single most important determinent of strategy, I wanted so share some humble thoughts as we hope that they provide value to your process. This isn't advice, as you know, and it certainly may be "off center," but it's starting to crystallize in my crowded keppe and I wanted to share.

Short-term: With the S&P stochastics toppy, NDX resistance (1550) looming and '05 highs a kitten's whisker away (S&P 1218/DJIA 10,865), the Minx has some hurdles in her midst. The action in the techs and financials screams "non-confirmation" as they've both considerably lagged the broader averages. Scotto Reamer (who's been sharp as a tack of late) also points out the divergences in the breadth, ticks, VXO and momentum. A pullback--or, at the very least, a pause--wouldn't shock me in the least although I will follow my short-term tea leaves for two-sided clues.

Intermediate-term: This is where it gets a bit tricky as the notion of a "blow-off top" is becoming less foreign to me. Mr. Greenspan is walking a thin line with regard to public perception but that may take time to manifest (see Franklin Raines). In the interim, and as a function of traction in the corporates and greed in equities, we could see a push higher that catches traders underinvested and weeds out the frustrated bears. As a function of my broader concerns, I will approach this scenario delicately and with discipline but I respect the possibility that it unfolds.

Long-term: No shocker here, I don't think this ends pretty. Either we print money, dilute the value of the dollar and buoy asset classes until foreigners balk and consumers choke on imported inflation OR Elmer runs out of ink and we enter into a period of prolonged deflation. My sense is that he favors the former as it has a potentially longer shelf-life (see January) but, at a point, the wheels will fall off the wagon and he'll lose all credibility. When that happens, the psychology bubble that has been inflated since we climbed out of the bubble abyss will pop and the schvitz will hit the fan.

These vibes are subject to change and don't reflect the potential for an exogenous shock, multi-border war or other unforeseen event. With volatility levels and sentiment skewed as they are, we are vulnerable to downside disconnects at any time. I still favor the energy and metals as long-term holdings despite the (25%?) risk of deflation but it'll likely be a bumpy ride as investors jockey their thought processes.

As I said to a good friend of mine who is retiring soon and looking for "cash flow," a long only strategy severely limited his options. If I could buy those two aforementioned groups and short tech and financials against them---and then move to Cabo San Lucas to open a lobster taco shack for ten years--I have a feeling that I'd be very happy when I returned home.

Good luck today.

R.P.

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