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The Chicken and the Eggshells

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Watch the financials as any sustainable rally has to include the piggies!

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"Oh I like this one. One dog goes one way, the other dog goes the other way, and this guy's sayin', "Whadda ya want from me?'"

--Tommy DeVito, Goodfellas


Good morning and welcome back to the spider shack. With last week's critique fresh in our mind, it's time to get set for a fresh five day grind. The action was fierce when we last stepped away with the flickering ticks in pure disarray. "The semis were up and the piggies were down," said Sammy the snake with a well deserved frown, "I'm starting to feel like the Minyanville clown with so many inputs floating around!" Can Boo turn the screws and unite the bear fight or will Hoofy step in with some bright bovine light? We'll know soon enough as we ready to thrill and roll up our sleeves for a romp in the 'Ville!

The last month has featured a slew of situations that have managed to merge together. It started with the technical backdrop that was DJIA 10,400 resistance (see below), intertwined with Captain Kirk and his wishbone offense, migrated into a false sense of security (in the face of the S&P auto punt), evolved full circle into hedge fund horror stories and finally arrived back at the macro conundrum. If you're feeling a bit overwhelmed by the constant curves, take solace in the fact that vertigo is an increasingly common condition among many market participants.

While we're bound to see intramarket rotations as a function of proactive positioning, the monolithic movements will set the tone for the broader tape. The massive injection of liquidity (on the heels of dot.com bubble) effectively reflated asset classes at the expense of our currency. While most folks have confused debt-induced demand with a sustainable economic recovery, the takeaway is that either the dollar must devalue or supply-demand driven instruments will deflate. We included a chart below that tracks the CRB (commodities) vs. the greenback to illustrate this point and the same dynamic applies to equities as well.

Adding to the uncertainty is chatter that the hedge fund community has potholes galore. While there is little doubt that blood has been shed in recent weeks, the million dollar question is one of containment vs. contagion. A maze of derivatives interconnects an endless contingent of counter-parties in today's global marketplace. That's a dangerous dance in a finance-based economy and while it's not the causation of pain, it can clearly exacerbate the effects of misplaced risk. The General Motors debacle (long debt vs. short stock) likely started a domino effect and may have contributed to further unwind (short dollar vs. long crude) late last week.

Our task at hand is to assimilate these competing crosscurrents and view the dew through an appropriate lens. As such, we must balance the prospect of stagflation vs. the potential that some of this "noise" is hedge fund hot potato. As I discussed during last week's radio interview, equities are a discounting mechanism and will reflect economic malaise long before the proof is in the pudding. That is why proactive risk management is such an important component of fiscally responsible decisions. By the time you read about textbook economic definitions in the mainstream media, your portfolio will already be well versed with lessons.

We power up this minxy pup to find Europe in the pink (slightly red), Asia off a bit (Nikkei dripping under the 200-day), the greenback grinding higher (+25 bips) and commodities (metal/crude) somewhat sluggish. A snapshot of equity technicals continues to support a Red Dye try as layered resistance remains above. There are many ways to define your risk and the method you choose is a function of time horizon and stylistic approach. Regardless of which way you're stacking your chips, please remember that the definition of an investment should never be a trade gone awry.

Good luck today.


Chart courtsey of stockcharts.com

CRB Index vs the Dollar Index (DXY): 1/18/05 - 5/13/05


Chart courtesy of Bloomberg


R.P.

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