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Freaky Friday Potpourri


Let's end this week with some jingle in your jeans...

  • Once in a while, during my short walk to work, I pop into Starbucks (SBUX) for a vanilla latte. It's an infrequent treat, if for no other reason than I have a fundamental issue with paying a finski for a cup of joe. I was craving a flavored shot of caffeine this morning, only to find that they were "out of water." Hmm, I thought, water plays will continue to work, whether it's ITT Corp (30% water, 40% defense) or the more popular PHO.

  • And then there are stories like this, which further support the secular thesis. I'll again say that I wanna own things that feed, power and educate the world and avoid players that finance or produce things we want.

  • Freaky Friday is underway as we fire up the final 20% of our week. The standout element is the traction in the dollar (+35 bips). It's a marginal move a grabby greenback has been an asset class headwind from 40,000 feet.

  • My "back of the envelope" litmus test on risk is three-fold. Do I have enough inventory to sell strength? Do I have enough dry powder to buy weakness? Do I have an "edge" and, if not, defined risk?

  • The homies, which have planted seeds of an echo bubble, are testing resistance. Keep this level in mind regardless of which way you're playing.

  • We noted the importance of the $85 level in Apple and, while technicals are but one of our four primary metrics, it does offer defined risk. $73-$75 "seems" to be where the next support resides on the chart.

  • Why are the metals taking it on the chin today? They've had a heckuva run, there's fresh chatter of fund liquidation and they've gotten a lotta sudden exposure. Still, taking a look at this chart, it sure looks like some (bullish) reverse dandruff could be setting up for the yellow metal.

  • What am I watching in sector land? TRAN 5000 (trannies), RUT 800 (small caps) and BKX 119. Those are levels of serious lore on the technical front and tight enough toggles to shape tight and defined risk.

  • And smile, Minyans, it could be a lot worse.

Minyan Mailbag!


You have recently discussed the potential of investment risk, should the US get into it with Iran. There was a posting on the buzz that linked to a report from an investment bank on what may happen in the global markets should a conflict arise. I can't find the link. Can you help me out?

I love the service, use it every day.

-Minyan Doug

Minyan Doug,

Sure thing, the article was War Games and I penned it about two weeks ago. It was also mentioned in the Buzz here. Please keep in mind that crude has rallied 14% since then while gold is up 5% (despite today's 1.5% pullback).

I still think they're both war plays but there are other powerful forces that can dictate the price action. Case in point is Professor Reamer's perspective on China. If this gorilla sneezes, a stiff deflationary breeze will blow across the collective bow. So, there are two sides to this trade and we need to see them both.

Good luck, cookie.


A potentially important observation on China from Professor Scott Reamer, featured today on the Buzz & Banter…

My firm recently analyzed the Shanghai 180 index (180 largest market cap weighted Chinese A-listed stocks) via our complexity framework. In effect, what we are able to conclude is that since beginning of December, the Shanghai index is within an unstable, critical regime that has a high probability of failing in a large way. In fact, the Shanghai index is showing ~70% of the unstable criticality that the NDX displayed in its run up to its 2000 peak. Thus we can expect a very large drawdown to start in this index in the next several weeks.

Why is this potentially interesting to US investors?

Recently, the Chinese monetary and banking authorities have been bloviating about margin concerns and speculation in the markets. And in a command economy, those very authorities are likely to be the precipitating exogenous crisis for the Shanghai index even as the endogenous market risks (as measured above via the complexity framework) increase to some critical state very very quickly. And not to be dismissed is the contagion potential in such globally correlated markets to say nothing about the implications for global GDP and the cynical vendor finance-relationship that the US and China enjoy. If the Chinese stock market suffers a 50% + decline in 2007, what are the likely policy responses (yuan intervention, credit availability, US treasury demand from PBOC, etc.)? And what impact would such a decline have on their appetite to hear more posturing from senators Graham and Schumer or from Mssrs Bernanke and Paulson?

From a macroeconomic standpoint, we can be reasonably certain that the real pool of funding (real liquidity as defined by the Austrian school of economics) here in the US contracting meaningfully (which is another way of saying that the malinvestments – housing, e.g. - pursued over the years are large and growing as the result of easy credit policies). Simultaneously, the Chinese (or more broadly the non-Japan Asia) real pool of funding is relatively healthy; and why the US has not yet experienced a significant credit cycle bust is owing to the fact that we are largely living off this real pool of funding from Asia. To the degree that the Chinese economy experiences a systemic financial shock (and the Shanghai index getting cut in third or in half would certainly qualify), their appetite or ability to keep "bankrolling us" with their real pool of funding comes into serious question. Thus, the Shanghai index might be this particular credit cycles canary insofar as it could precipitate the long overdue credit cycle contraction that has eluded global G7 asset markets and the US economy for the past several years at minimum.

The SSE180 index is now down 12% since Tuesday and 4+% overnight again. Like a monkey knife fight, speculating on this particular economic/political maelstrom has a lot of potential entertainment value. Unless it's your monkey.


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