The Box Trot
...remember that the path to capital preservation and prolonged profitability is paved with discipline.
Walk out of any doorway
Feel your way, feel your way like the day before
Maybe you'll find direction
Around some corner where it's been waiting to meet you
Good morning and welcome back to the shivering shack. Tensions are high in the flickering ticks as traders dig in for a fresh daily fix. On the heels of a scathing two-week decline that caught alotta folks leaning the long way, the stage was set for Turnaround Tuesday. Equities were extremely oversold on a trading basis, commodities were indicated higher across the board, volatility levels were tickling a year-long resistance zone--indeed, the bovine had every excuse to stake their claim to upside fame and ride off into the sunset. Alas, it wasn't meant to be as anxiety manifested and stuffed the buyers on our way to one of the more disappointing closes in recent memory.
As is often the case on Wall Street, post-rationalization was prevalent as we unrolled our sleeves and powered down our turrets last night. There was chatter that a fresh spate of Bird Flu was to blame, adding a dose of uncertainty to already uncertain emerging markets. Some pointed a finger towards inflation, as higher input costs arm-wrestle pricing power on the bottom line of corporate America. Others observed that the stock option dilemma is the tip of the iceberg and, one by one, technology companies will have to reassess and restate years' worth of earnings. And there was again chatter of liquidation, as a bubble of hedge funds come to grips with the other side of the carry trade.
The truth, as it so often is the case, likely lies somewhere in the middle. It's no secret that the markets have become a monolithic animal, synchronized by the common bond of liquidity. We often discuss the big picture dynamic, an emerging realization that either asset classes must deflate or the US dollar must devalue as we edge through a finance-based economy. That's been demonstrated in the action since the back-end of the bubble, a period that saw the almighty greenback slice 30% off its pie as the S&P secured a third of that on the upside. Indeed, the machinations of a boxed in Federal Reserve have become increasingly transparent, due in large part to the thin patience of the foreign holders of our debt.
We power up our Wednesday pup to find the global markets on the edge of their seat. In a derivative-laden financial fabric, it would be myopic to discuss the US equity horoscope without digesting the global currents in play. With stock markets around the world--from Russia to Hong Kong to Brazil to India to Stockholm--suffering their worst rout in years, the obvious question is one of containment vs. contagion. There's little doubt that many of these seemingly secondary markets are looking stateside for signs of leadership. And undoubtedly, the onus will be on US equity bulls to step up and show these bears of will what will really is.
As there are many balls in the air and much ground to cover, I am going to break from my traditional delivery and end today's morning vibe with a spate of Random Thoughts. Enjoy the ride, my friends, and remember that the path to capital preservation and prolonged profitability is paved with discipline.
- I entered yesterday with an outsized bet in the metal and energy complex (via defined risk calls). As much of my paper was of the front month variety (and I'm ever-so-conscious that the looming holiday weekend is a three day recipe for premium decay), I punted a slew of that exposure into the opening flurry.
- I've still got the basic premise of my thesis in place--long energy and metals vs. short financials--but it's a bit more balanced and predicated in out-month options. My current proxies of choice include Weatherford (WFT) and Pan American Silver (PAAS) on the long side and JP Morgan (leveraged to Fannie Mae and gold volatility) and Citigroup (one of the few financials that isn't oversold) on the short side.
- Speaking of the metal shares, there's little doubt that the notion of nationalization is weighing on the miners. The Peruvian election may lift some of those fears but it's a dynamic that warrants attention for anyone playing the precious metals through the miners. Case in point, Newmont Mining, in their 2005 annual report, indicated that 34% of their revenue came from Peru. While potential disappointment may already be "priced in" Newmont's shares, the risk is that "hoarding" becomes an all-too-familiar trend.
- A dose of perspective for anyone dabbling in commodity land: While the recent sell-off has been fierce, the CRB remains well above its multi-year trendline (CRB 325ish).
- With the VXO up 50% since the beginning of May, the notion of stock replacements and married puts isn't as intuitive as it once was. It's worth noting that the volatility levels were three times as high during past contagions (Russian Ruble, Thai Baht, LTCM) but it remains unclear whether our current juncture is a pause (that refreshes) or the seeds of something serious. Rest assured, by the time that distinction becomes clear, option prices and stock levels will have already baked it into the cake.
- Apple and Google stochastics remain at levels that have preceded previous rallies. If and when you're looking for "rentals" in tech on the long-side, these are potential vehicles.
- S&P 1280 and NDX 1635 are intuitive upside levels of lore. S&P 1257 (200-day) and 1250 (point & figure support) are bovine backstops to monitor into slippage.
- The early "heads up" yesterday that something was amiss was the sudden sluggishness in the big cap brokers, namely Goldman, Merrill, Morgan and Lehman. This complex led the tape higher and, as such, must remain on our radars as a broader market "tell."
- And finally, one of the first lessons I learned on the Street was that the ability not to trade is often as valuable as trading ability. These are tough times and difficult tapes so when in doubt, sit it out. There are alotta folks standing in a circle shooting at each other and dry powder will certainly serve you in good stead when the dust settles.
- Good luck today.
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