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Monday Morning Quarterback


Perception is reality on Wall Street and conventional wisdom continues to dictate that this is an overt positive (it is not).


Good morning and welcome back to the summer shack. With August options six feet below, it's time to get set for a freaky new show. Last week was a clean sleep for the bovine bunch as they took "less inflationary data" as validation of Boom Boom's policy and confirmation that the rate hike cycle is in the rear-view mirror. Perception is reality on Wall Street and conventional wisdom continues to dictate that this is an overt positive (it is not). Follow-through and follow-up will be the task at hand for the Matador Crowd and that is our focus du jour as we open the door.

As Minyans know, I slipped two legs in my metaphorical bear costume on Thursday with a wary eye on the commodity complex. The thought process, while somewhat simplified and likely early, was born from a watchful eye on the CRB as it broke the 200-day moving average and probed the trendline that's been in place since early 2002. I've been viewing the global financial machination through an "asset class deflation vs. dollar devaluation" lens where commodities and equities equally benefited from the rising tide of the post-bubble liquidity spigot (at the expense of the dollar).

The "stop level" I implemented was BKX 114, which would be an all-time high for the money center banks. I did this for two reasons--First, because fresh acne by the financials would bode well for the broader tape (as go the piggies, so goes the poke) and second, from a "tracking risk" perspective, much of my bet is predicated in this complex. There is, of course, the question of the catalyst itself, particularly as the commodities bounce in the pre-market action. The rally could indeed continue, my friends, which is why I'm keeping close tabs on the dollar (-65 bips today), our tells and, of course, my defined risk.

A few Random Thoughts to get our party started right...

  • If Boo was looking for a few flies last week, he could potentially point to the lack of volume (which may simply be seasonal) and the expiration influence (which may have been a 'draw' to S&P 1300).

  • Following the (we're) fine print of the weekend press, some early Monday upside follow-through could occur as traders detox from their expiration hangover (and square their derivative positions). Turnaournd Tuesday looms large but we'll cross the bridge over the river "why" in 24 short hours.

  • If you missed last Thursday's Buzz, it's worth a gander as we drilled into the potentially premature deflation discussion. We always aim to provide both sides of any discussion and with perception ("less inflation is good!") and reality ("deflation would be really bad!"). A slight cognitive step away from each other, we would rather paint the picture before you appraise the art of our weird science.

  • Along those lines, and as I've got mad respect for both Succo and Scotto, I wanna share a Buzz that John scribed on Friday. It's food for thought when juxtaposed against sightings of Goldilocks and proclamations of upside innocence.

Is this really what "strong and stable" means? - John Succo, Friday, August 18th. 1:33 PM

As Minyans head into the weekend after hearing President Bush tell us that the economy is strong and stable, Scott and I put this list together to summarize the real situation:

1) The yield curve is in inversion (as
Bennett pointed out this morning). The six month 10 year curve is 33 basis points inverted (it reached 55 basis points in 2000).

2) Real money (confirmed by the declining money stock) is in free-fall declining another $65 billion last week. This indicates the velocity of money continues to slow.

3) The Fed just paused concerned with economic activity.

4) Small cap stocks continue to underperform large cap stocks. In addition, mortgage sensitive stocks have plummeted, indicating that the engine driving 70% of past economic growth is sputtering.

5) We are now seeing sector rotation out of transportation stocks into utility stocks.

6) Commodity stocks and energy stocks (especially drillers and not so much integrated companies that hedge oil prices) have performed poorly lately.

7) Conference board leading indicators suggesting 7-10 months until GDP contraction.

8) Housing inventory growing and prices declining.

9) Corporate spreads beginning to widen.

10) Negative personal savings rate worsening; profit margins six year high due to cost cutting; stubbornly high cap utilization rates despite supposedly high GDP.

Gospel? No. Jazz? No. Blue Grass? No. But certainly something to "see" as sexy sirens surround the Street. This conversation may be entirely premature (wouldn't be the first time in the 'Ville) but we would rather Minyans see all sides of the risk spectrum before making bets with hard earned coin. Many thanks for sharing your Monday with us and we'll catch you on the other side of the Buzz & Banter as we figure it out in real-time.

Good luck today!


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Position in financials, metals
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