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Tuesdays with Elmer


My favorite threesome--a rock, the hard place and the Federal Reserve!


Good morning and welcome back to the creaking crack. We enter today with bated breath to see if Elmer can again cheat death. He's done it before and flummoxed the bears who've patiently played the musical chairs. "One of these days the long song will end," said Boo to his crew of brown furry friends, "and the crimson that most still can't comprehend will reintroduce our secular trend." Will today pave the way for more disarray or postpone the lone tone of ursine dismay? It's turnaround Tuesday so come grab a seat as we fire it up and dance through the heat!

Yesterday's session was the definition of nothingness as the global markets (sans crude) basically spun their wheels. It seems as if everyone is waiting for confirmation that our fabled Fed will cut off their nose to raise their rates. Further, tech bellwether Cisco (CSCO:NASD) will paint the tape after the bell when Sir Chambo talks while simultaneously sipping his half-full glass. We've seen (and heard) this movie before but we still must wait for the final score. That is, after all, why the game is actually played.

Checking our metric line-up, it seems as if the bad news bears have a stacked squad. We've technically busted through the '04 range and despite S&P 1050 acting as a potential backstop, previous support (and newbie resistance) has settled in at S&P 1080 and NDX 1360. A case can be made for a positive divergence in the BKX (hasn't made a fresh low) and the piggies should be a focus after this round of tightening moves into the rear-view mirror.

With regard to the fundies, the "things are fine" crowd should take a trip down memory lane and revisit the conference calls of March 2003. While I'm of the view that old school multiples will migrate to single digit midgets before the grizzly hibernates, that isn't a necessary assumption for purposes of our discussion. Multiple contraction and earnings deceleration, however, are concepts that traders should familiarize themselves with regardless of their long-term vibes.

Psychology clearly isn't as complacent as it was at the end of June (VXO 13!) but remains a far cry from traditional levels of genuine fear. The trick is to understand where we are on the "denial-migration-panic" curve and appreciate that we may be in the midst of that process. While we can clearly climb a wall of worry, we must also remember that the entire world was certain that the market would remain firm until the election. Hope remains in that regard and we should respect that hiders and waiters are waiting for a rally to sell their overage.

The final--and perhaps most important--metric remains the structural influences. While I could ramble on about the imbalances in the system, capacity on the Street, derivative underpinnings or the flawed model of our Fed, the short-term focus should be the liquidity fluidity coming out of Washington. It's my opinion that they're well aware of the painted corner and will pull out every stop to prolong the inevitable for as long as possible.

We power up this Tuesday pup to find Europe clinging onto marginal gains (DAX still below previous '04 lows), the metals and greenback flattish and the stateside futes a touch higher. The big call of the day is a Lehman punt of the chip sector so we should keep an eye on those puppies for signs of relative traction/slippage. Also, please remember that the minxy dynamic will considerably shift after Elmer spews (2:15pm) and attention turns to the Cisco kid's shoot-out after the close.

Good luck today.

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