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Citizen Cane


...the reaction to the news is more important than the news itself.

Come on all you pretty women
With your hair a hanging down
Open up your windows
Cuz' the Candyman's in town

(Grateful Dead)

Good morning and welcome back to the flickering pack. We're deep in the throws of earnings galore as bulls and bears posture for the front door. On the heels of the snazzy Monday run, you could almost smell the nervous anticipation in the air as we settled into the Tuesday groove. We've seen a few too many one-and-done upside runs in recent weeks and, on the back of a handful of high profile snafus, rumors were rampant of a Debbie Downer cameo. Alas, it wasn't meant to be and the hungry bovine absorbed the supply and marched higher through fields of joy.

As we're apt to say after years of watching flickering ticks, the reaction to the news is more important than the news itself. We certainly saw pockets of stock specific poundings--UPS and 3M come to mind--but the broader tape shrugged off the malaise and powered on. In the process, three subtle yet important dynamics manifested. We broke the mold of "selling rallies equate to immediate gratification," we burst through the S&P 50- and 200-day moving averages and the trend of steady "lower highs" was rendered obsolete by the charts and the people who follow them.

Perhaps the "tells," from a trading perspective, were Centex and Texas Instruments. The former, a darling for the homebuilder euphoria, issued horrific forward guidance while the latter, a widely held semiconductor mainstay, released in-line earnings. Both stocks rallied for better than three percent--with a steady bid all day--and gave pause to the ursine cause. We know that stocks, as a leading indicator, price in news before it hits the tape. With most homebuilders suffering an organic two for one split this past year--and the chips dipping 30% from '06 highs--we can't help but wonder whether current concerns have already been discounted. That's the funny thing about fundies--the news is always best at the top and worst at the bottom.

Indeed, according to our friends at Thomson Financial, earnings (as of last Friday) are beating estimates by an average of 5.2%. And while I'm a card carrying member of the "margin compression" camp (the fatal flaw of fundamental analysis), I know that perception is reality when it comes to financial decision making. I opined yesterday on the Buzz & Banter that the little hairs on the back of my neck sensed some unfinished upside business and my personal risk profile reflected that feel into the close. The recipe is simple--seeds of green that sow spates of optimism which, when coupled with curling intermediate stochastics and a perceived fundamental foundation, embolden the bulls. You don't have to agree with it--you just have to respect it.

There's been alotta chatter of late regarding a potential slowdown or the emergence of deflation. I've got a slightly different rub on a very similar perspective, one that bridges the chasm between perception and reality. My sense is that we've been fighting this phantom for a few years but he's been masked by a lower dollar (-28% since 2002) and mountains of debt (a bi-product of a coordinated agenda of fiscal and monetary stimuli). For me, the question isn't whether we're in for a harsh economic reality check but how (it will manifest) and when (it will creep into the collective consciousness). The blips and dips--and the opportunities therein--exist in a window between what is and what we must regrettably one day face.

I don't believe equities---or asset classes, for that matter--can rally without an attendant devaluation in the US Dollar. The correlation is stunning since the back of the bubble, be it gold, crude, stocks or any other supply/demand continuum. And my sense is that the games people play through unconventional means of reflation are wearing thin, both in terms of the velocity of money and with regards to the patience of the foreign holders of our debt. But it will work until it doesn't and the onus is on us to dance while the music plays. My only hope--and the intent of my rather risk-adverse approach--is that I'll find a chair when the sounds fall silent.

Therein lies our task at hand, a three dimensional juggling act that marries risk, reward and time. I'm constructive for a trade but in the context of fully examining (and explaining) the caveats involved. My vehicles of choice remain energy and metals and my intent is to sell (short) tech and financials on rallies. It's a tedious process in a difficult time but I don't see another way to approach the fray. I will say this--if and when the current concerns morph into a collective "all clear," my intention is to get entirely more aggressive on the short side. Until then, I wanna stick and move and pick my spots while defining risk and remaining patient. Sometimes we jab, other times we'll cross--but we'll always keep our right hand up.

Good luck today.

Position in financials, metals

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

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