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Controlling Risk: A Hamzei Analytics-Minyanville Chat, Part 1

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This is a transcript of the Controlling Risk chat hosted by Fari and Hamzei Analytics on Aug 31, featuring Minyanville professors Greg Collins, Kevin Depew, Jeff "Showtime" Macke, Greg Weldon and Jason Goepfert. The discussion covered a wide scope of topics including retail / consumer, the macro environment and general trading.

Click here for Part 2.


Fari Hamzei: welcome

Greg Weldon: FARI ... what's happening my friend !!!

Fari Hamzei: what a day Greg

Fari Hamzei: this week has been unreal. I wrote here yesterday that 7 years ago SP futures went thru a huge range expansion and recovered the following day. I believe we dropped DJIA went down either 350 or 550 point, probably 550 -- it was unreal. Then in just over month it repeated as LTCM went belly up on Oct 8th.

Fari Hamzei: Greg and Kevin put an excellent program on at Ojai about two weeks ago and we thought it would good idea to have a series of short chats highlighting the best of MiM2. Welcome Greg.

Fari Hamzei: you all know Greg and Kevin so without further to do -- here they are - the MC's for today.

Jeff Macke: (waving hello)

Greg Collins: First and foremost thank you Fari and thank you to all of you for being with us today. For those of you who don't know I'm Greg Collins, Editor in Chief at Minyanville and I am joined today by an tremendously talented group including MV's Managing Editor, Kevin Depew, along with three of our contributors including Greg Weldon of Weldon Financial, Jason Goepfert of Sentimentrader.com, and Jeff Macke of Macke Asset Management.

Greg Collins: The purpose of this session is recap our second annual summer conference - "Controlling risk and staying in the game" - while sharing some thoughts from a truly amazing set of discussions.

Greg Collins: With that said, and recognizing there are a number of familiar names on this chat list, I'd like to attempt to clear up what I think is some confusion about Minyanville and its purpose. I receive emails everyday talking about how Minyanville is too bearish. To those folks I would point out, as I have in the past that Minyanville is not about getting anybody to think a certain way.

Greg Collins: Our focus is about helping people to see all sides of the trade and be better prepared to sort through a tremendous amount of information overload. No trader should ever read a website or watch a television program looking for someone to tell them what to do. That is a certainly a recipe for disaster...

Jeff Macke: What Greg is talking about is really a bit of a nuance that's hard to convey (judging by the persistent "Perma Bear" label)

Greg Collins: Regardless of market posture, it is difficult not to argue that there are a tremendous number of cross-currents at work and notable imbalances which potentially litter the path toward profitability.

Jeff Macke: to that point, we've got retail sales coming out tomorrow. The numbers are most likely going to be horrible. They were tracking that way long b/f Katrina....

Greg Collins: The question then is what to do about all of these cross currents and how to find the opportunities while at the same time controlling risk.

Greg Collins: Macke kick things off and talk about some takeaways from Ojai and about some of the risks you see out there.

Jeff Macke: running with the retail idea and risk... this Katrina thing really makes the trading side of retailers hard. The stocks were rolling over prior to the storm. They numbers figure to get worse. The question, of course, is whether or not Katrina will give the stocks some breathing room from the Street. The stocks seem oversold but there are more fundamental shoes to drop, judging by last month's sales. I'm short some BBY going into the numbers, but I'm itching to take a crack at some of these guys on the long side, if we can get a hard down open

Kevin Depew: technically, the RTH has fallen from 101 to 94.5, which is right on point & figure trend line support basis .5x3 chart - trend line from the April 29 lows

Jeff Macke: in the context of Ojai, how much of the downside "risk" is now in the stocks, and excused by Katrina.

James Ellis: with retail looking so poor and consumer spent up not pent up I would think a long term leap Put on WMT would be a reasonable short investment at the appropriate gleeful moment. Not today's biz.

Jeff Macke: The thing on Wal-Mart is it's simply the slowest rollover EVER.

Greg Weldon: and the CMR rallied back quite well too Kevin, why? because of the pancake flattening in the forward-forward Eurodollar strips. The markets are sniffing a change in Fed bias

Jeff Macke: the fundies have been grinding to a halt for a year... I'd like the opinion on the WMT chart from some of the technicians in the house, both short and long term

Greg Weldon: Dec05-Dec07 is FLAT ...

Kevin Depew: I love the way Greg Weldon's' work puts things in a macro context. The CMR is a very interesting chart; on a point & figure basis it violated multi-year trend line support from March 2003 lows, a significant trend line break in my view

Jeff Macke: Prof Peppy, what's the technical pic on WMT?

Greg Weldon: is that true ...interesting, love the P+F work

Kevin Depew: well you said it best, it's the slowest rollover in history, at least feels that way. WMT has been an underperformer versus SPX equal-weight index since October 2002

Greg Weldon: Greg Weldon: let me just blurt this out ... MACRO wise ... like a ship, the Titanic ... Fed at the helm. USS Consumer, allegedly unsinkable ...hits the iceberg...OIL iceberg...is the hull ruptured ??? Is the Fed below deck, ready with repairs ??? Can the ship sink ???

JB: hi Fari. What about the high-end retailers (i.e., not WMT or TGT)? In Toddo's bifurcated society, seems these hold broader clues on housing and strength of US consumer?

Jeff Macke: Hey, JB. There's a lot of overlap in the definitions of these retailers. TGT is relatively higher end than WMT

Greg Collins: I think that's the real question though, at what point do we see higher energy prices de-rail the consumer?

Jeff Macke: the department stores (KSS, SKS, JCP et al) tried to show life earlier in the ear but seem to be rolling over (which would dovetail nicely w/ JB's theory on the consumer "tell" being in the middle/ upper end)

JB: jeffmacke - agreed. WMT fell first, now TGT customers seem to be affected by $3+ gas. Luxury retailers still seem ok so I am trying to watch them but I don't know them as well.

James Ellis: well if BBBY breaks 40 it will break bullish support line and that is a premium retailer

Kevin Depew: Prof. Macke, is that part of WMT's ongoing problem? Being locked in to the discount segment without the ability to move toward the TGT level without alienating core customer base?

Jeff Macke: (that I'm short, James Ellis.... so, I like your thinking...) I think their problem is that they've gotten too huge to act like they used to. They can't be as aggressive w/ vendors, they can't put stores everywhere.

James Ellis: rth has a double bottom at 95. It can't seem to blow out the #s anymore

Jeff Macke: on top of which, they are really committed to food which simply has lower margins than traditional discount

Greg Weldon: RTH low = 50% Fibonacci from May-Aug run

James Ellis: good point

James Ellis: many times the ugliest chart bounces like a kangaroo

Jeff Macke: but those charts don't taste just like chicken, I bet.

Greg Weldon: yeah, where's Laurie when you need a kangaroo

Kevin Depew: re: kangaroo bounces, that's one of the reasons I like to think about charts as providing a context for whatever move is taking place. They are not the "be all, end all" tools, just context pictures to help put price action in perspective.

Greg Collins: I'd actually like to circle back to Greg's thoughts on the macro picture...tell us more about your concerns there. Talk about the yield curve, housing and Greenspan's comments, and some themes from the macro panel if you would.

Greg Weldon: risk ...that was the central theme. It is a macro mine field. We are bound to detonate something, like oil. I really like the ship theme. The allegedly unsinkable USS Consumer has an oil iceberg ripped a hole in the hull and we don't even feel it yet

Greg Collins: one of the points you made was about a number of extreme imbalances - what are they specifically that you are focused on?

Greg Weldon: well, within the oil theme, is diminished capacity among Asian exporting nations to continue building surpluses. Oil import inflation, more acute now in domestic currency terms intensifies the export competitiveness and price disinflation remains dominant.

JB: if BBY breaks down, wouldn't that imply that all the people buying flat-screen TV's for $2500 a piece may be affected by the energy tsunami Weldon described so well in his Metals Breakout at MIM2? Where's Fleck when we need him to talk about all the tech inventory in the channel?

Greg Weldon: Indeed, exactly - WMT. The poor get poorer, and the discounting continues to trim margins. Wealth polarization is already intense and worsening as debt driven consumption cannot sustain GDP growth. There is NO wage-income inflation to support it - only ... the Fed.

Jeff Macke: I don't think we need to get to Fleck's notion on those flat-screens. What the pricing drop suggests is the continuation of low or nonexistent margins on higher ticket goods.

JB: but the corporate bond market hasn't flinched yet one bit?

Greg Weldon: excellent point, credit spread wise. Neither emerging market spreads until now ... note IDR, THB. Some of the peripheral currencies, and equities, Taiwan for example are softening for sure. A possible precursor, especially given that we don't yet know the extent of oil price 'damage; already inflicted

Greg Collins: What about Wal-Mart itself which just brought a deal recently that was well received by the market (as evidence of the tenor in corps)?

Greg Weldon: I think the onus is on the Fed and the forward strip flattening in ED is key sign.

JB: isn't Fed likely to monetize this oil price spike just like Arthur Burns did in early 1970's?

Conor_Sen: Greg, many have feared that the yield curve would invert, but if the short-end plummets again and the long end sits still or lowers a bit, is that really any better?

Greg Weldon: or ... both ends decline, and we cross the Macro-Event Horizon, into the debt-black hole. The Fed has restored a lot of eco-steroid juice to the short-end and they are likely to be forced to inject it. The question is, how painful a wealth disinflation is needed, first ...OR, will oil do the trick, and force the Fed to be more pro-active

JB: Brian Reynolds makes good case that refis could surge to historic highs if 10-yr note breaks down through support, liquifying the consumer yet again. Can't be good long-term, but consumer has tapped his home again and again.

Greg Weldon: the Fed will eventually be forced to pursue that exact dynamic JB:

Greg Collins: any thoughts on Greenspan's recent comments specifically about housing Greg? A bit of a change there...thoughts?

Greg Weldon: he is trying to rationalize his actions, maybe trying to skew his legacy which, unfortunately, is not likely to be favorable. He is very aware of the incestuous co-dependency globally, with the US consumer and home wealth reflation debt. That's my gig man.

JB: Greenspan bought into the bubble in Feb 2000, was chastened and vilified by Congress at Naz 1100 in Sept 2002. I suspect he won't make the same mistake twice - say what you want about him, he is a cagey politician IMO

Kevin Depew: politician is the operative word there.

Greg Collins: Let me circle Jason Goepfert into this equation at this point and discuss a comment you made recently about understanding the sentiment dynamic / field position (which it seems much of your work focuses on)

Greg Collins: "It's important to define risk in the context of greater market environment. Don't short into an overbought condition just because it's overbought."

Jason Goepfert: yep, pretty basic stuff but it's easy to forget (I do so myself sometimes) - but it's critically important to keep at the forefront and continue to remind ourselves

Greg Collins: talk about what your work is saying right now about where we are

Jason Goepfert: it's a relatively boring time now where I'm at because there are so many conflicting data points

JB: seems like today's climate with 8,000 momentum traders, er hedge funds, that trends and greed go further than they used to as people are forced to chase things higher

Jason Goepfert: I've shortened my time frame, as the effective cycle of many of these sentiment extremes have shortened too. Where something took two months to play out before, now it takes two weeks

Jeff Macke: so, Jason, do you think these cycles continue getting tighter until, essentially, we have an "efficient market" (shudder)?

Jason Goepfert: LOL, never. We'll always get overreactions, today being a prime example. These types of extremes in the PMI number, for example have historically been very...BULLISH.

Fari Hamzei: amen

Jason Goepfert: but you just don't see that in any of the panic-ridden headlines

JB: PMI number seems to reflect Saut's hot hot cold cold economy very well

Greg Weldon: LOLOLOL

Jeff Macke: well, sure on "today being an example" but then we are talking about a time frame considerably tighter than "two weeks" there, aren't we?

Jason Goepfert: yes, for sure, jeff

Kevin Depew: As an example that is slightly different from Jason's take, one of the key indicators I follow, the NYSE Bullish Percent Index has been above 70% (high risk historically) for 17 of the past 25 months. That is a very long time, and basically means that whenever stocks pull back, they do so in the context of NOT giving new breakdowns on point & figure charts... until recently.

JB: I am really focused on that Optionable Stock Bullish Percent reversing down from yet another higher level as a precursor to an eventual turndown in NYSE BP. But then I watch the corporate bond market not flinching. A friend of mine just took top spot at large private equity firm, tons of money still waiting to be put to work on a levered basis.

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