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A Wake Away


That's bull!


Arrows of neon and flashing marquees out on Main Street
Chicago, New York, Detroit it's all on the same street
Your typical city involved in a typical daydream
Hang it up and see what tomorrow brings

(Grateful Dead)

Good morning and welcome back to the sneaky trap. The games have begun in the city of critters as the bulls drape the tape in glamorous glitter. As the quarter winds down and the clocks all tick quicker, the jury is out who will soon snicker. "The tape is the pulse of our glamorous nation," said Hoofy the bull with giddy elation, "and with all the talk of trader frustration, I'm certain we'll see some late desperation!" Is that all it takes, a bovine bull rap? Or is our young bear now setting a trap? It's coming on quick so sit up--stand still!--and roll up your sleeves for a slug of the 'Ville!

It's sadly ironic that the world is drowning in a sea of easy money yet nobody I speak with seems to find money easy. The tales of performance have flattened considerably in the last few years and folks outside the market are feeling a similar pinch. I have a wide swatch of friends in a multitude of industries--construction, technology, real estate, retail, education--and they all have similar tales to tell. If I didn't know any better (and the mainstream media didn't exist), I would swear that the global money supply has tightened considerably!

This lends credence to Scotto's causation mantra and Succo's thesis of compression. The hedge fund community is pressing bets as they attempt to substitute size for tradable volatility. This has profound implications for the ripples in the financial mechanism that will inevitably percolate. The best analogy I can offer is that of a boat powering through a sea of tranquility. But while a conventional vessel leaves a wake that increasingly calms, the SS Minx--as a function of leverage and derivatives--will forge a wake that grows increasingly violent as it migrates through the financial food chain.

These elements have been lurking for a few years and while they've yet to matter, please understand that they're an "effect" rather than a "cause." This subtle disconnect has emboldened the bulls and undermined the bears but that optimism is, in many ways, equally troublesome. Just as outsized moves in the marketplace used to provide a "bungee" (once they reached an extreme condition), such will be the case when any one of a multitude of catalysts emerge. That's the other side of leverage and one that many Americans have yet to realize.

What to do? Respect the fragile foundation and take steps to protect your wealth before trying to accumulate more. Understand that the environment has shifted and the onus is on us to adapt. What has worked in the past may not work in the future or, at the very least, may not work as well. Ratchet down expectations and be disciplined in your approach.

Something tells me that double-digit returns will be stellar in the years ahead. That's less than a percent a month, cookie, and if you can grind it out, you'll be an all-star. I'll leave you with the visual of 8,000 hedge funds and many more mutuals standing in a circle shooting at the same stocks. Sooner or later, they're bound to turn the guns on each other.

Good luck today.


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