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Monday Morning Quarterback: Ready to Blow!


Is the heat getting to the Street?


Good morning and welcome back to the warming. As triple-digit heat bears down on the big city, folks aren't in the mood to mess around. There's nothing like sticky shirts and sweaty brows to bring out the best in people, eh? Mix in sloppy markets, higher unemployment and an uptick in geopolitical tension and you've got the recipe for some serious therapy!

We've been talking about societal acrimony as one of 2008's central tenets and indeed it is. This weekend, while sitting on an un-air conditioned and delayed Amtrak train, I perused the headlines. "Spiking oil has the U.S. over a barrel", "Israel eyes attack on Iran", "Baked Apple in the oven.", "$5 gas awaits at the pump", "Mr. Met attacked at Shea!"

Digging a bit deeper, I found investors have been "rushing into safer investments, such as crude" as "it's clearly on a trajectory of $200… if not $300." I shook my sweaty head from side to side and listened to people around me complain about their lot in life. How the heck are we supposed to "think positive," as my grandfather taught me, with so many reasons to be anxious?

Through a professional lens, I found myself wondering if the big picture blues we've steadily foreseen-first in Ojai and again in Vail-were finally front and center. While I pride myself on my stiff upper lip, the weight of the world is becoming a heavy load to shoulder.

Pass the Bubble!

To be sure, we've found our way through bubbles before. Anyone who watched Yahoo (YHOO) and JDS Uniphase (JDSU) move fifty points for days, if not weeks, on end, will echo John Maynard Keynes in saying that markets can stay irrational longer than investors can stay solvent.

Ditto the real estate bubble, when everyone and their sister took down second and third homes and condo-flippers were the center of cocktail conversation.

And remember China? It was the world's growth engine, the center of the universe, despite the fact that they've got few natural resources and strained standard of living.

And now crude, with its eye-popping, incessant strength, is stealing the spotlight from the credit crunch, which I believe is the mother of all bubbles and the real danger in the marketplace. We've flipped the debt bubble switch, my friends, and that's a major problem for a finance-based economy.

While we've migrated our way through various manias, I'll again offer a word that, figuratively and literally, sums up our current state of affairs: cumulative. The imbalances from the back of the tech wreck were never alleviated, they simply changed shape to protect the affluent.

And that, my friends, is why debt destruction, deleveraging, deflation and that other pesky "D" word will likely be a part of the mainstream lexicon for years to come. The good news-and yes, there is some-is that the sooner we start taking our medicine, the quicker a sustainable rebirthing of the business cycle can begin.

Back to the Slippery Slope…

Before we share some Random Thoughts, let's circle back to Texas Tea as it's the topic of the day. On Friday, I chronicled that I was revisiting my short stance as oil ticked near the previous high. I put out a short in the morning but when it didn't fade lower, covered it in kind. Nothing ventured, nothing gained but more importantly, discipline over conviction.

Late in the day, Professor Lance Lewis mused-and I parroted on TV-that the gold to oil price ratio was ticking to a historic low. That spoke to a potential pairs trade of "long gold, short oil," which would be working out quite nicely, thus far. I didn't slap it on but that had more to do with my preferred mandate of risk reduction into the weekend, a mindset that other money managers seemingly shared.

My continued sense is that major risk remains and while I'm not smart enough to foretell the timing, I'm seasoned enough to manage my process and keep a tight leash on exposure. BKX 75 and S&P 1370 remain near-term technical contexts above while S&P 1350, the mid-point of the March to May ascent, is support that bears watching below.

Good luck Minyans and let's be careful out there.

Random Thoughts

  • So Lehman (LEH) comes out with a $5/share loss and needs to raise six beans. If there's one thing I've learned after 17 years on the Street is that where there's smoke, there's fire. You don't repeatedly defend yourself in the open marketplace unless there's genuine cause for concern.

  • Has anyone ever seen Carl Icahn and Mel Brooks in the same room at the same time?

  • My thoughts on crude in a nutshell? (In a muffled tone) Either something is going down in Iran (via Israel) or this is a classic blow-off top.

  • Mike O'Rourke, the talented strategist at BTIG, notes: "Both the Martin Luther King Day and St. Patrick's Day bottoms were accompanied by 75 basis point eases from the FOMC. The market is now left to its own devices to create its next low. Since future prospects for the economy remain dismal, there is considerable downside potential from current levels."

  • "Greed is slow and builds over time, but fear is fast and comes quickly in the night". Mr. Practical

  • Nobody is bigger than the market, we know, but the war is made up of many battles.

  • I always feel like somebody's watching me? Because they are! Imagine trading, writing and building when, out of the blue, in the deepest darkest corner of A.D.D., hearing Liz Claman say in your ear "Todd Harrison, what's your take?" only to look up and see yourself on TV?

  • My secretary went to renew her military ID card on Friday and the base was on 'Alpha' Alert, checking cars, under cars, etc. so obviously something different about today." Minyan Ron.

  • Why can't I get the image out of my head of Dick Cheney sitting on top of an oil rig with a "Mission Accomplished" banner behind him?

  • Ya think Minyanville is flagged in some, dark 24-style back-office as President Charles Logan continues to check in?

  • Did I ever mention that when I started at Morgan in 1991, my first boss would walk in every morning and say "Who's this LOGIN guy and why is he on my computer?"

  • The VXO +20%? All the way to... 23? Isn't that, I don't know, PISHAW relative to previous pain fulcrums?

  • I still believe that precipitously lower energy prices are gonna be problematic for the market (through the lens of deflation). Given our current mindset and field position, however, it's likely that the initial knee-jerk pop that Fleck spoke of likely occurs first.

  • Given McCain's age and Obama's inexperience, the chosen running-mates may have more of an influence on this year's election than during any other time in recent history.

  • You can learn a lot just by watching. In that vein, keep an eye on Apple (AAPL), which is off 1% despite still green futures.

  • Good luck Minyans. Discipline over conviction, now more than ever.


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