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To Be or Not to Be


Keep an eye on the piggies as BKX 100 approaches!


A lovestruck Romeo sings the streets a serenade
Laying everybody low with a lovesong that he made
Finds a streetlight, steps out of the shade
Says something like, you and me babe how about it?

(Dire Straits)

Good morning and welcome back to the front lines. Another five session trek is upon us as we weigh the fray that is the Minx. If you sense a heightened awareness as you settle into your digs, you're not alone. Ten short sessions seperate us from the end of the third quarter and portfolio managers around the world are anxiously prepping pen and paper. This hasn't been the easiest of environments to operate in and the performance anxiety is particularly palpable. With mechanical influences behind us and Elmer on tap, trigger fingers are on the itchy side as we power up this frisky pup.

The tape took a round trip last week as September expiration influences pulled the S&P towards 1225 into Thursday's close. Once the magnet lifted, the Matador Crowd, freshly enthused by some jig in the piggies, set their sites on the awaiting acne. Alotta eyes are watching S&P 1250--multiyear highs and our friend Fibonacci--as an absolute validation into year end. The crowded nature of that technical level makes it increasingly difficult to game (and subject to false signals) but that's a conversation for a different day.

First things first, our fearless Fed will take the stage tomorrow and spin their tale of twisted tongue. Nine out of ten Fed Fund Futures surveyed are recommending a rate hike for traders who chew on such forecasts. So, for purposes of prognostication, it's all but given that Elmer will once again lift his skirt. The question then becomes a two-fold debate in the city of critters. Will hawks or doves accompany the policy directive and, perhaps more importantly, how will the collective psychology react to that news?

You know the show by now-Hurricane Katrina, with all her might, has introduced a foreign issue to our central bank. Should policy makers have "compassion" on this particular go 'round and leave the spigots as they are? The economic recovery was already fragile (especially if you're conscious of the difference between legitimate growth and debt-induced demand) and the last thing Gulf Coast consumers need is marginally higher borrowing costs. On the flip side, we all see the uptick in input prices (read: inflation) despite sanguine assurances from the BLS that pricing pressures are as tame as a kitty.

The simple truth is that we were experiencing simultaneous deflation (wage growth, commoditized goods with no pricing power) and inflation (things we need-energy, healthcare, education). While there's no downplaying the destruction of Katrina, the stagflationary seeds were planted long ago. That may not matter in the next few trading sessions-quarter-end, earnings (Goldman, Morgan, Fedex), preannouncements (August sucked) and macro influences (gold at the highest level since 1988?) are concentric focuses-but it's a debate that won't go away regardless of how harsh the fore winds blow.

Minyan Michael Santoli summed it up in his excellent weekly missive when he posed the question "Is the market exhibiting impressive defiance or worrisome denial?" That question will purse lips for the foreseeable future and arrive at an answer with the benefit of hindsight. In the meantime, the onus is on us to stick to our discipline, identify a suitable time horizon and make absolutely certain that our risk profile synchs with that timeframe.

Good luck today.


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