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Tales From The Crypt

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Happy endings often happen but life, as we've learned, is no fairy tale.

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"I don't think I want to know a six-year-old who isn't a dreamer or a sillyheart." -Uncle Buck

I used to love fairy tales. No matter how ornate the plot, everyone lived happily ever after. It was one of those small creature comforts that imbedded a sense of security in us all. We sorta figured that Cinderella would one day marry her prince. We reasonably assumed that the third little pig would get the last laugh. And we always believed, in the back of our brain, that Goldilocks would find a place that was "just right."

Of course, young Goldy experienced a rude awakening. While she peacefully slumbered in the baby bear's bed, the angry ursine surrounded her and ended her journey on a somber note. Sure, she was fat and happy when she met her fate but her last visual was a slew of sharp claws that ushered in a deep sleep of a different kind.

Fast forward to today's tape.

As the mainstream media celebrates the inevitable porridge that are new highs in the Dow Jones Industrial Average, we'd be wise to remember the lessons learned from the young and impressionable blonde. The current psychology feels a lot like it did in May, when headlines of An Old Fashioned Economic Boom were in vogue and journalists anticipated the "woo woo's and throwing paper" that would inevitably be unleashed on the floor of the exchange.

Of course, this time is different and we would be wise to note the subtle shift. While concerns of heat exhaustion were the hindsight demise of the spring assault, latent fears of a global slowdown will likely be the upcoming culprit. To be sure, the Matador Crowd has chosen to focus on what's gone right. The sharp correction in crude, for instance, is still being viewed as a consumer crutch rather than a deflationary precursor. When investors begin to ask "why" rather than "what," perception, which is the market's reality, will shift on a dime.

I opined a few weeks ago that the spill in the commodity space, as measured by the break of the five year uptrend of the CRB, might have ominous ramifications for the equity realm. Through my lens, the reflation trade that ushered in the high-tide that lifted all asset class boats---at the expense of the dollar--offered visualization that the seas have shifted. That hasn't played out, which is to say that I was wrong. Only time will tell if I was simply early.

The trick, from where I sit, is to carefully watch how the moving parts of the tape interact in the weeks and months ahead. Given the heretofore carnage in the commodity space, it remains to be seen whether a subsequent lift in that complex will trigger a rotation (out of sectors that have outperformed, such as banks and homebuilders) or a broad migration higher as a function of technical affirmation. And IF--big if--we indeed set sights on new highs, it'll be important to note how many "non-confirmations" (such as an absence of participation by leadership groups) accompany the move.

To be sure, there is a subtle difference between a "lack of inflation," as evidenced by yesterday's PPI, and "deflation," in a conventional sense. The scenario described above is predicated on a mean-reverting bounce in the commodities, which has yet to unfold. Yogi Berra once said that we can observe a lot just by watching and that lack of sponsorship warrants attention. There have been rumblings that the supply side pressure can be chalked up to hedge fund liquidations such as Amaranth but we would be wise to remember that rationalization is a double edged sword. In a derivative laden, interwoven financial fabric, losses like that can shift from containment to contagion in a hurry.

I'm not smart enough to offer when the bloom will fade from the bovine rose but I'm seasoned enough to respect the risks. With the consumer mired in debt, $2 trillion of adjustable rate mortgages resetting by the end of next year and societal acrimony perking up from Hungary to Thailand--not to mention the fragile nature of the Middle East--the global landscape is telling us all we need to know about risk versus reward. Perhaps we can navigate ourselves through these dicey times but I learned a long time ago that hope isn't a viable investment vehicle.

Happy endings often happen but life, as we've learned, is no fairy tale.

R.P.
position in financials, commodity equities

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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