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The Double Edged Sword

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White light to N'awlins!

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Good morning and welcome back to the shaky shack. With tensions sky high throughout the land, the bovine are set to make a last stand. They're betting that dips are gonna get bought, a noble yet dangerous Matador thought. "Levels are near and my risk is defined," said Hoofy the bull while leading the blind, "I know that my vibe is often maligned but I'll make the bet that we won't soon unwind." Is he gonna slide down the slippery slope or is there a sense of legitimate hope? We'll know soon enough as we smooth out the bumps and ready ourselves for a hike up the Hump!

I, like most of you, spent the better part of last night wrapping my paws around the scene down south. It's a remarkable situation in all the wrong ways and our hearts extend to those who are suffering. Through the years, we've experienced our fair share of tragedy-an unfortunate yet unavoidable fact of life-and, in the process, learned the necessity of removing emotional ties from the decision making mix. That's our task at hand and one that will serve us in good stead as we tread ahead.

Hoofy will argue that, despite the summer bummer, equities trade relatively dry given the state of our union. He's been eyeing NDX 1550 and S&P 1195 as it's the tightest defined risk and arrives in the context of twisty and oversold stochastics. I told our bold bull that he can try anything as long as he's disciplined and fully understands the caveats. He believes he does but, as I'm apt to do, I offered to share the other side of the trade.

There are two potential pitfalls that remain in the wake of Katrina-economic frailty and structural underpinnings. We've long discussed the delicate nature of our economic recovery (debt induced demand vs. legitimate growth) and higher input prices certainly won't help the surging imbalances. While the "exogenous shocks" in Madrid and London were "contained and defined" in a matter of days, the uncertainty of Katrina will continue to linger and cast a cloud across the horizon.

Perhaps more intriguing, and entirely more difficult to measure, is the potential for a domino effect through the fragile financial fabric. While betting this way, and for this reason alone, is a low-probability affair, we must respect the conditional elements that are in place. The compression in the marketplace, lopsided psychology and an intricate maze of derivatives aren't a causation of a disconnect but will greatly exacerbate the price action if triggered.

John Succo often discusses the probability spectrum and the need to position ourselves in a way that "respects" each outcome. The collective psychology has been conditioned to buy dips and that could again unfold. I will simply ask Hoofy-and my fellow Minyans-to "see" all sides of this juncture and err to the side of capital preservation. If you don't know, don't guess-it's the surest way to excuse yourself from the trading table.

We power up this Hump Day pup to find Europe in the green and crude losing steam as we ready to tap the Strategic Petroleum Reserve. I opined on yesterday's late day Buzz that Hoofy was gonna give the upside a try (N's over S's?) and he seems rarin' to go. The question is one of sustainability as technical, structural and psychological hurdles remain. Watch the financials, monitor the breadth, eye our levels (both ways) and please don't make equity decisions based purely on the price of crude. That, to me, is a trap door waiting to happen.

Good luck today.


R.P.
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