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Random Thoughts: The Phantom of Deflation


Dollar rally may be fly in equity ointment.

The following content was posted on the Buzz & Banter earlier today and is reposted here for the benefit of ye faithful.

Sniff and Sniffage - 10:54 a.m.

My apologies on the late start, Minyans. The reason will be readily apparent when you read my opening missive. It was a tough night for yours truly.

Winky and I went home long some Schlumberger (SLB) puts, Schering-Plough (SGP) calls and a handful of situation specific stuff. I also added back a Todd-lot of Baidu (BIDU) puts on the opening and have since set my stop at my entry point. Again, my apologies on the after-the-fact commentary but I'm operating with no sleep so please bear with me.

The standout action, quite obviously, is in commodity land. With gold off $45, crude 3% lower and the dollar higher, albeit marginally, I can't seem to shake the word "deflation" out of my crowded keppe. I'm likely early on that--shocker, right? We were talking about stagflation two years ago--but it speaks to the risk in the perceived safe haven.

The email indicator sorta supported this. I'm not "that" guy, as I hope you know, but there were two very prevalent themes on the MarketWatch message boards after I posted The Bear Scare Sunday night.

The first was that I was absolutely nuts for offering a constructive case for the financials and the other was acrimony associated with my comment that "nobody makes money in bear markets--not even the bears." There must have been 100 posts screaming "I own gold! I own silver! I'M MAKING MONEY!"

On my word, I don't wish misfortune on anyone and the only reason I share this tale is to extrapolate two lessons. Emotion is the enemy and commodities, despite what you're reading in the mainstream media, are NOT safe havens.

I'll be back. Kick butt on the hump, Minyans.

"Carry on, my wayward son. There will be peace when you are done." - 12:30 p.m.

I hear ya, friend, but I'm not yet in Kansas. Soon though as I know that this too shall pass. Some thoughts from the "suck it up" department:

  • I've yet to cover any Schlumberger (SLB) or Baidu (BIDU) although the mechanics of the swing likely dictate making a disciplined put sale in the former situation. As a matter of fact, I'm gonna do that before typing the next bullet.

  • Through the lens of asset class deflation vs. dollar devaluation, the action in the dollar and commodities continues to be the biggest potential fly in the equity ointment.

  • I've been looking for a dollar rally this year and I've been wrong as a song (as a function of socialist policies). With that said, while a grabby greenback may be an effect (rather than a cause), it's making my scrunch my sunburned nose.

  • The easy trade in the banks is officially over. That doesn't mean it can't continue, obviously, but 20% gains in two days is a beefy move no matter how you slice it.

  • It's pretty amazing how many cat-loving Minyans there are. Heck, it's incredible how many awesome people comprise our community. That's always been the vision of the 'Ville. Surrounding yourself with people you trust with skill-sets that complement your own and watching each other's back.

  • Thank you. On a whole lotta levels.

Answers I Really Wanna Know... - 1:04 p.m.

  • While the sharpest rallies occur in the context of a bear market, won't Hoofy correctly assert that some backing and filling is healthy following the spirited sprint we've seen?

  • Especially with market internals flat while the futures are pretty in pink?

  • Even though I'm trading BIDU like a Todd-lot, shouldn't I communicate that I covered half my short out of homage to Winky Wright?

  • Why is it that I now miss all the little annoying things Zoë used to do, such as head-butt me every morning at 6:00 AM (weekends included)?

  • Why do I get a strong sense that Phoebe is gonna eat her way through the grieving process?

  • Y'all see the action in the consumer non-durables?

  • Will doing a TV spot this evening with swollen eyes dent my street cred?

  • Should I really care?

  • Why do I keep eyeing Apple as my upside rental vehicle, if and when?

  • Back-to-back multiple triple digit Tuesday gains can't both be head-fakes, can they?

Keep On Keeping Up... - 1:29 p.m.

In the interest of keeping up ye faithful with the flow---and I'm using that word freely--I took the rest of the BIDU trade and bought some Apple calls back for a little upside exposure (against the Schlumberger puts).

Again, none of this is advice as 1) my risk profile and time horizon is unique from yours and 2) I'm often In-N-Out like a double double with cheese (yum!). I feel compelled to repeat this nugget as there are so many new Minyans in the fold.

I guarantee some of them are saying "Who the heck is this tree huggin', cat lovin' bleedin' heart?"

My hand is raised high. :-)

Of Flies and Tries - 2:00 p.m.

You know how they say that the sharpest rallies occur in the context of a bear market, with a conscious nod to the last two Turnaround Tuesdays? Commodity bulls are quick to offer that the most vicious sell-offs occur in the context of a bull market. And you know what? They would be right.


While the market continues to write the most interesting script in the history of finance, we would be wise to remember Our Wishbone World. We're standing at the crossroads of an incredibly important juncture, one that has implications for asset classes, the dollar, social mood, risk appetite and just about anything driven by supply or demand. That's why we must remain lucid at all times as we attempt to read the Street signs.

This, my friend, is the fly in the "that was the low" argument. With the dollar rallying for the second day in a row and commodities breaking down worse than I did last night, the potential exists that we've turned a dark corner. We spoke about the Phantom of the Market in the summer of 2006 but policies were put in place to ensure the devil we know (inflation) trumped the devil we don't.

There is no way to know if this is, in fact, deflation manifest. I would strongly urge you to read The Phantom Column, however, so you can allow for this scenario in your probability spectrum. Mr. Practical and I both believe that all roads lead that way. Having a road map in your back pocket is probably a good idea.

May peace be with you.



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Position in SLB, BIDU, AAPL and SGP.
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