The Ostrich Economy
Let there be light!
There are too many who remember
They say a handful still survive
To tell the world about the way the lights went out
To keep the memory alive
Good morning and welcome back to the sand bag. Despite Thursday's brief blindfold, the meandering Minx found her way to familiar ground. It was the eleventh straight week the S&P has sailed this snoozy cruise and traders are anxiously eyeing range resolution. Can Hoofy spur the beast towards a bovine feast or will Boo break the bank and start an ursine spank? It's a new week in Minyanville so power up (and smile) as we truck into the muck!
Trading, in its purest form, boils down to the simple premise of probability and the identification of an advantageous risk/reward. Case in point was the initial reaction to the massive blackout last week and the reflexive selling after-hours. We've been warned of potential cyber-attacks by government officials and, at some level, a statistical probability dictated that it wasn't an accident (index futures were massively lower). As the blame game unfolded and the hand-holding began, the financial markets discounted any chance of foul play and the Spooz snapped back.
While the event was perceived as organic (the curiously anticipatory action in Chloride Group PLC (CHLD:LSE) and Capstone Turbine (CPST:NASD) notwithstanding), it served as a reminder that exogenous shocks still exist. Terrorism, as despicable as it is, cannot be wished away and ignored as a potential market force. Just this weekend, saboteurs blew up part of Iraq's main oil pipeline. It was the eleventh such attack in the last two months and if they continue (or spread to the Saudi refineries), there will be ominous ramifications for our economy. Already this morning, in response to this latest attack, crude is trading up a full percent.
That type of handicapping is our task at hand as we look forward and eyeball this fledgling and fragile recovery. There are always two sides to every argument and if we rally anew, hindsight will offer 20/20 vision. There is, after all, nascent signs of an economic pick-up and a powerful agenda at the global central banks. We must respect the forces in play, expect the unexpected and incorporate those inputs into our risk profie.
With that said, it remains my (humble) opinion that a disconnect has formed between perception and reality. Current levels are pricing in the "best case" and while that can happen, it would be myopic to ignore the warning signs. You're familiar with the bearish rant: insiders are dumping stock at a record pace, the composition of earnings are suspect, complacency abounds, the deficit is ever-expanding and we're operating against a backdrop of debt and derivatives unlike any in history. A statistical probability exists that this will end messy and the chance you assign to that outcome will go a long way in dictating your individual risk profile.
At present, I'm operating with a two-pronged approach and have positioned myself (leaning short) for the near-term while allowing my broader bear thesis the benefit of time (via longer dated paper). If the Minx powers through the trendline created by the series of lower highs or the semis confirm their breakout at SOX 400 (read: tight stops), that'll provide the first signal that the bears should proceed with caution. At that point, I will likely unwind some of my nuance positions (while gingerly adding to my core puts). Once again, this isn't a suggestion for you to follow along, it's simply a communication of the process I'm currently employing.
In Minyanville news, details of the first annual Critters Choice Awards are beginning to spread and the momentum is gaining traction. In coming weeks, expect to hear more about the talent (as it confirms) as well as particulars regarding auctions, beneficiaries and sponsorship opportunities. It is our hope that, through the years, this event will raise millions of dollars for the kids. Every journey begins with a single step but when it comes to children's charity, that's always a step in the right direction.
Good luck today.
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