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The Critter Sitters

By

Forget Waldo...Where's SNAPPER?

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Good morning and welcome back to the constant flack. The bulls had Boo dead to rights yesterday but, in a blink-and-ya-missed-it move, a crimson tide covered their hide. It was the second consecutive session that good news was sold and while the damage was purely collateral, the message was sent. In an effort to assign reason to the rhyme, I gathered the menagerie last night for a pow wow with Professor Succo. The conversation went a little something like this.

Daisy: So, there really IS a John Succo...we figured you were just a figment of Toddo's imagination. He's not bad either...

Boo: Of course he's real...he's a bear and they live in reality. Speaking of which, it's mighty interesting that the market sold off two straight days on "good" news. For months, all I heard from Hoofy was that it's bullish when bad news didn't matter. Well, now you've got the mirror image reflecting a potential shift in the dynamic. Right or wrong?

Hoofy: (taking off his rose colored glasses) Bro, despite the lower overnight futures, the Minx is a stone's throw from it's recent highs...isn't it a little early to be celebrating? She flies like the wind when she runs and, on that rare occasion that she rests, it's a begrudging battle.

Sammy: To be fair to Boo, the S&P's have been in a sideways holding pattern since the beginning of June. And, to be fair to Hoofy, one can make the case that the Nazz is consolidating above the breakout level (NDX 1250). I'll tell both of you this...after the recent run, a pullback was intuitive. The next big leg, however, is very much up for grabs.

Boo: (under his breath) Grab this!

Succo: (laughing) Look at the chemistry makeup of the structural dynamic. Volatility in the bond market is twice that of equities. Why are bonds so whippy? An abundance of negative gamma , to start, and with Fannie Mae (FNM:NYSE) and Freddie Mac (FRE:NYSE) levered as they are, the potential implications for the housing market are huge. If housing goes, the consumer is gonna take it right on the kisser and, if that happens, the economy is going nowhere fast.

Toddo: I share those macro concerns but to be fair, I've been eyeing them for a while and they haven't seemed to matter. If rates substantially back up, they'll surely become a focus and we could get the dreaded double whammy (stocks and bonds both down). According to Professor Reynolds, however, it's not an issue...yet. Meanwhile, the aggregate earnings (outlooks) haven't validated the recent rippage. There's been select bright spots (many of which were achieved via cost cutting rather than end demand) but there's also been a fair share of disappointments (Motorola (MOT:NYSE), Lucent (LU:NYSE), EMC (EMC:NYSE), Nokia (NOK:NYSE) ect.). While many banks "beat," that may very well have been a function of the rally itself. Regardless, many of the industrial companies don't see the recovery that Elmer seems intent on willing into a reality. Factor in the historically high valuations and a dependency on an iffy consumer and, well, there's Boo case.

Snapper: But as you said, the structural elements haven't been on those conference calls.

Hoofy: Yeah chicken Toddo, you're so concerned that the sky is falling you're failing to realize how sunny the day is! Let the bears get their fur in a frenzy--a fresh short base is just what we need for the next leg up!

Boo: And you're so blinded by the light, Hoofy, you don't even notice the rising temperature!

Toddo: Listen, the beauty of Minyanville is that we accept all kinds of critters...bulls, bears, turtles...you name it. Our job isn't to tell you what to do--we have our opinions just like anybody else. There's clearly been a bull case and it's can be summed up in two words: liquidity and agenda. That's what makes the game tough--there's a coordinated effort by the central banks of the world to buy time and give the recovery a chance to emerge. But what happens if it doesn't? When does the psychology shift and investors realize that we've seen this movie before? Here? A few hundred points? Days? Weeks? Months? That's our task at hand, kids, and it'll hold the key to the vault.

Sammy: As always, the technicals should lend a hand. There's clearly been supply above S&P 1000 and discernable resistance at S&P 1015. On the downside, there's support tranched all the way down to S&P 950 (which is THE support). Also, please note that the 20-day moving average is crossing the 30-day moving average (to the downside) and the last time they crossed (up), it was mid-March.

Boo: Well, I'll say this. This is an important juncture--we're either basing or churning. I'll admit that the uptrends (higher lows/highs) are still in place but between the complacency, crowded bull camp, rate backdrop, earnings mosh and alleged "recovery," the writing's on the wall. Humpty, er, Hoofy the hillclimber may toss on his hiking shoes again but if he slips, I don't wanna hear it.

Succo: (looking at Toddo) Is this an average night for you? This is sheer lunacy! How the heck do you put up with this collection of characters? They're out of their mind!

Toddo: No Succ, they're in my mind...which makes for a mighty crowded town hall meeting at times. Suffice to say that they're on a mission and have the greater good in mind. If we can provide a forum for education, discussion and honest discourse while, at the same time, raise money for children's education, it's all good my brother. Speaking of which, let's blow this taco stand and swing by Rosa Mexicana for some hongos...you know how I love their hongos!

John and I stepped up and excused ourselves from the conversation. It was clear that the critters had a lot to discuss and we were starting to get hungry (shocker there). As we walked out the front door, I could hear the buzz and banter start anew. There sure were a lot of dissenting opinions but, hey, that's what makes a horse race. And in a city of critters, ponies are par for the course.

Good luck today.

position in fnm

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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