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Beast of Burden

By

Stay on your toes!

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Note: We apologize that due to technical problems the following article appeared this morning only as a link in the Buzz and Banter but was not available via the Minyanville Gazette. Due to the educational nature, we are re-posting the material for review. We apologize for this problem.

"You can put me out, on the street
Put me out, with no shoes on my feet
But, put me out, put me out, put me out of misery"

Rolling Stones


Good morning. In recent weeks the market has periodically exhibited a feeling of complacency. However, the action on Wednesday took on the somewhat unfamiliar element of worry and left many wanting out of the misery. We've had geo-political risk swirling overhead for some time now but it was the situation in China, an issue I've been following with concern recently, that became the reason for traders to again ignore the positive earnings season. Old news became new news as the market lent credence to comments by the Chinese premier stating that the rapid over-investment and spending must be aggressively curbed in order to stave off inflationary pressures. The worries, as we had wondered, certainly took their toll on the global equity markets, and commodities in particular.

On that chatter, all of the metals/commodities melted. Todd discussed the potential unwinding of the carry trade yesterday and although it appears the banks have postioned for higher rates (BAC, C conf calls) - there are still a number of fixed Income hedge funds still engaged in this trade. As the talented Prof. Succo has noted previously, and as Fleck alluded to last night, the unwinding of leveraged positions exacerbates volatility and I think that's perhaps partially what we saw yesterday. Who knows how much more lay in store with the leverage in the system.

There was talk of fund liquidation in silver as well as as it was off about 5%. Gold off as well and the XAU nose-dived 7%. The move into gold and silver became a place for the hedge fund community to hide as the bond market presented an unfavorable risk / reward and geo-political events / uncertainty have made equity market investments dicey. It's unclear how much part hedgies, as an investor group, played in the run-up in the metals but it would certainly appear to be some portion of the move. We'll see how that area digests the action with so many seemingly heading for the exit sign. If the fundamentals are positive on a long-term basis then a shake-out of the weak holders renting exposure probably isn't the worst thing? Time will tell...

The dollar index (DXY) was left staring at 5-6 month highs (91.50) - it climbed 76 bps, edging thru the 200 dma (90.84). The yield on the 10 year note climbed to a 4.49% - its highest closing level in since early Sep '03. Oil was testing $38 / brl yet again without success.

Volume on the move was heavy with 2.04 bln shares changing hands on the Nasdaq while 1.85 bln traded on the NYSE. Up volume on the NYSE was just 46 mln to 1.605 bln down volume NYSE. For its part, breadth was ugly with 2564 decliners to 748 advancers on the Big Board and Nasdaq 2483 decliners to 673 advancers.

As I suspected, the biotech's took a rest as the speculation was put on hold with Celgene's (CELG:NASD) termination of a Phase III trial. The AMEX biotech index (BTK) was off 3.4%. That action, along with the restatement/management shake-up at Nortel (NT:NYSE) led the Nasdaq to its fall of 2%. I have been keying off the Russell 2000 Index (RTY) for signs of weakness in the small cap high fliers and that index underperformed, getting hit for 2.32%.

With sentiment swirling about and Beeks delivered key economic data, all eyes will remain on the reaction to the Q1 GDP report (4.2%). That report, along with the market's reaction/digestion will likely trump technical levels. We'll have to see where things end up as a function of that report. In an environment where good news is bad news, and bad news is bad news, it probably makes sense to do less and position for less tricky market conditions.

We got earnings from Andrew (ANDW:NASD), DaimlerChrysler (DCX:NYSE), Exxon Mobil (XOM:NYSE), Georgia Pacific (GP:BYSE), Gilette (G:NYSE), Glaxo Smith Kline (GSK:NYSE), and Raytheon (RTN:NYSE). After the bell look for reports from Foundry (FDRY:NASD), Gateway (GTW:NYSE), and Nortel (NT:NYSE).

Altria (MO:NYSE), Advanced Micro (AMD:NYSE), Nortel (NT:NYSE), and Corning (GLW:NYSE) bring out the horse and pony for their shareholder meetings.

As always, we'll scan the action and highlight the relevant info as it all unfolds. Good luck.


position in silver, qqq

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