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Kentucky Sour Mash?



Good morning. After a taxing week and a long April for many, the market staggers into a Friday with a great deal on its collective mind. We have no shortage of macro level concerns with the rate / inflation / growth debate, unrest in Iraq, Bush (dis)approval ratings, North Korea, and China to wrestle with.

I have been focused on the issues in China, particularly the potential impact on the global economic picture (in terms of trade/growth), exports and currencies. That fear has picked up steam this week and it appears as though the banking system will be forced to in fact deal with the rampant over-investment bubble that has been created in that country. Perhaps, most troubling is the fact that we don't truly know the extent of the problem as the data is notoriously misleading (corrupt) in that country. Think about it this way - if we can't get an accurate reflection on the SARS problem - what makes you think you can rely on the GDP figures. They've got tricks that would likely make the Bureau of Labor Statistics proud. Anyway, it seems just a few months back, that China and India were all over the tele-tubbie radar screens as the next big thing. Just keep that in mind the next time you're watching the financial news and they highlight a segment asking if something is the next biggest thing (true kiss of death). They are rarely (if ever) early - and by the time it ends up on television it usually means we're in the later innings. That's not a comment on growth potential as much as it is a comment on near-term sentiment/psychology.

Todd mentioned the potential un-winding of the carry trade recently. Many fixed income hedge funds have had this trade on for some time as a way of virtually printing money. If we are seeing an unwind, a combination of the sheer size involved, along with the leverage involved likely means there is volatility ahead in this aspect. An unwind isn't something that would occur overnight. The Russell 2000 Index (RTY) continues to remain on the radar screen as market weakness and a change in the liquidity conditions could have a bigger impact on the small caps. They have been a major beneficiary of the excess liquidity (Taser?) and if we start to reign that in, my belief is that we could see weakness there. As the conditions become potentially dicier, I wonder whether the speculation game becomes even more dangerous and money flows into the quality and defensive names. Not sure if that occurs, but something to keep an eye on.

The biotech's have continued to catch a breather and the chips continue to slip; that's not a positive development for the Nasdaq. KLAC Tencor (KLAC:NASD) and National Semi (NSM:NYSE) have been soggy lately and I'll be watching there for any signs of traction. Oil took a break after the recent strength and was hit for 3% yesterday on the Philly Oil Service Index (OSX). The XAU got stuffed at the 83ish resistance we highlighted. The rate sensitive names were back to their tricks as the homies (HGX) and REITs (RMS) got hit yesterday as well.

Beeks drops off personal income (0.4% exp), personal spending (0.7% exp) at 8:30, U Michigan confidence (94.0) 9:45 and Chicago PMI (61.0) at 10:00.

As I mentioned yesterday, with good news (earnings) bad news (largely ignored), and bad news bad news recently, it seems prudent as we prepare to enter the starting gate to take a step back and wait for a little clarity. As always, we'll scan the action and highlight the relevant info as it all unfolds. Good luck.

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