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Bottoms Up!


Four primary metrics prepare us for the future.

"You should see the toast. I couldn't even get it through the door!"
-Uncle Buck (Uncle Buck)

The abundance of information in the marketplace is a lot to swallow. By chewing through inputs one at a time, the process becomes much easier to digest.

Four primary metrics shape the tape. When viewed in isolation, they're inherently flawed. When assimilated properly, they serve as legs under the trading table that balance an approach.

Last week we discussed whether our current juncture was akin to 1998 or 2001. That destination remains to be seen but the journey is where the path to profitability resides. It is in that vein that we scribe today's vibe.


News is always best at the top and worst at the bottom. Given the decline in the market from the October highs, we must now ascertain how much bad news is reflected at current levels.

As of Friday's close, with 73% of the S&P 500 having reported, Bloomberg projects that overall earnings will be down almost 19% from the same period a year ago. Some will argue that a litany of write-downs in the financial sector skewed the data but it's a flawed argument.

If I removed pizza, pasta and holiday parties from my fourth-quarter diet, I could make the legitimate case that I'm 175 pounds.

It does, however, make the trajectory of earnings more difficult to discern. Therein lies the art of financial prognostication and the risk of human fallacy. If we're to assume that the charges related to sub-prime contagion are in the past, we must make the assumption that the other side of zero-percent financing will be contained.

I would offer that a shallow, transitory recession is priced into the market but further credit comeuppance is not. Given the recent news from American International Group (AIG) and American Express (AXP), that's a tall glass of faith for the bulls to swallow.


I'm unsure if traders follow technical analysis because it works or it works because traders follow it. Either way, it's got enough of a following to capture investor attention and provide a context with which to frame risk.

Every investment professional I know is watching the January lows for signs of a double bottom. Those levels-DJIA 11970 and S&P 1310 on a closing basis-are circled on trading desks throughout the Street.

The financials and transports, both of which held "higher lows" relative to the mainstay averages, also command space on our radar. These are considered positive divergences and historically relevant precursors to the more widely watched financial proxies.

As with any chart, it'll work until it doesn't. Hence the fatal flaw.

If the retest scenario plays out, it could pave the way for a trading rally. The broader picture continues to warrant caution, however, as lower highs remain in place.

In short, we've got room to run in the context of a bear market bounce but until proven otherwise, that's all it will be. S&P 1405 (from where we broke) and S&P 1450 (lower highs) are formidable resistance levels, if and when they should arrive.


There is a massive disconnect between what the credit markets are saying and what the stock market is hearing. Either the former will stabilize or the latter will follow the debt unwind lower.

Yesterday's perceived upside catalyst was news that Warren Buffett proposed taking $800 billion of liabilities off the hands of troubled bond insurers Ambac (ABK), MBIA (MBI) and FGIC.

Mr. Buffett is a known philanthropist but there's nothing charitable about this effort. Indeed, if this proposal is accepted, he'll have cherry-picked the most profitable part of their business and left the pits for management to choke on. 15% haircuts in these names yesterday support this thought.

There are no easy answers. The debt bubble took many years to manifest and the other side of the credit expansion will be profound. As the powers that be pull the strings-desperate times call for desperate measures-we must allow for relative upticks in the context of more pervasive deterioration.

The U.S. dollar remains a key structural element of this equation. Asset class deflation versus dollar devaluation is the toggle we together face as foreign holders of dollar denominated assets watch the evolution unfold in real-time.

The structural imbalances are cumulative and they've been building since the back of the tech bubble. The proposed bailouts, stimulus packages, conduits, mortgage rate freezes and working groups are an attempt to buy time. It could work for a while but it won't work forever.


The single most subjective variable is the psychological metric. Shifting social moods leads to changes in risk appetites and spending habits, both on the consumer and corporate level.

While spates of near-term capitulation have littered the landscape over the course of this slippery slope, conventional wisdom is clinging to the notion that the credit crunch and, by extension, the equity malaise is transitory.

Ben Bernanke himself has assured us that we're not in a recession. In the psychological continuum of denial, migration and panic, that puts our Federal Reserve chairman squarely in the first trimester. That, in and of itself, is somewhat worrisome.

What's clear is that the immediate gratification mindset is experiencing a drastic sea change. Whether it's a function of need due to the inelasticity of debt or want, with hopes of proactive preparedness, misses the point. Risk reduction, curbed spending and tighter belts will dominate the mainstream mindset before the process of price discovery completes.

Expect societal acrimony to manifest as the election draws near and evolve geopolitically as the U.S growth engine is criticized abroad. This is not a popular message but it's one that must be heard. For when the going gets tough, the tough have a tendency to protect their own interests.

Tying It All Together

An assimilation of these metrics seems to point to the same thing: The potential for higher prices exists in the near-term as risk rises across the board. The January lows are levels to watch but, as technicals are a context rather than a catalyst, should be used to frame risk rather than create it.

We must prepare for a different breed of market, one that is unfamiliar to many of the neophytes currently running money. We will see sharp rallies, steady declines and unfamiliar attitudes. The response to the recent Sallie Mae (SLM) auction is a case in point. The collateral itself wasn't toxic but the reaction to it was.

Regardless of how the next few percent shakes out, remember that there are two sides to every market. They'll each get loud when the price action validates the view but a steady hand should guide your ride. Practice discipline over conviction and surround yourself with people you trust that have skill-sets that complement your own.

It's not easy but it's not impossible. We'll get there, one step at a time.

Fare ye well.


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No positions in stocks mentioned.

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

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