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Three Tips for a Tough Tape


Finding a way through financial fog.

"Was that seat hot or what? I feel like a Whopper. Turn me over-I'm done on this side!"
-Del Griffith, Planes, Trains & Automobiles

It's getting harder and harder to keep a stiff upper lip. Consumers are getting squeezed from their table to the tanks, the housing market is in a seemingly incessant spiral, war stories are dominating foreign affairs and it's hotter than a Nelly song on the East Coast!

As temperatures tickle into the triple-digits, the heat on the Street is equally palpable.

Financial firms are in desperate need of capital, as evidenced by the recent Lehman Brothers (LEH) offering, the Federal Reserve is stuck between 'flations with slowing growth on one side and higher input costs on the other and, to add insult to injury, under-the-gun money managers will put pen to paper in three short weeks and share their fare for the world to see.

No, it's not much fun in finance these days but it is what it is and we do what we must. The way I see it, we have two options. The first is to wave a white flag and walk away, leaving our money matters to someone else. The other is to reach down and dig deep, wanting it more than the next guy and putting in the effort to prove it.

With a conscious nod to the latter matter, I offer three thoughts that could pave the way to better days.

Splitting Aces

Lance Lewis, writing on Minyanville late Friday, drew our collective attention to ratio between the price of gold and the price of oil. At the time, the undervaluation of the yellow metal relative to Texas Tea was near a historic extreme. Following yesterday's action, we're still there in spades.

There are a few ways to play this factoid. Investors looking for an inflation play or geopolitical hedge may want to consider gold as an alternative to oil.

Outright equity players could opt for the miners-Newmont (NEM) and Gold Fields Ltd (GFI) are two of his favorites-with the thought that when this ratio reverts, they'll win on both the appreciation of the underlying metal and a reduction in fuel costs. There is risk to an outright bet-in my view, all roads lead to deflation-but I share this option for those who disagree.

Active traders, for their part, could slap on a pairs trade, getting long gold and short oil plays on a dollar-weighted basis and position for a regression to the historical mean that captures the disparity. This, in my eyes, is the smartest bet and one I've legged into for a trade.

Let Levels Work for You

Technical analysis is one of four primary metrics, with fundamentals, structural forces and psychology playing equally important roles in the trading equation. While I've long viewed levels as a better context than catalyst, they offer defined parameters with which to frame risk.

In that vein, I'm watching several key zones in the immediate future.

S&P 1350, a 50% retracement of the entire March to May move, is front and center as near-term support. Technical levels should be drawn with crayons rather then pencils and as such, I would extend this zone to S&P 1340 for those watching at home.

BKX 75 was oft-discussed support for the financials on the front nine of 2008 and will act as resistance should the piggies catch a poke and retest the level from which they broke.

NDX 2000, the uptrend from the March lows, is also worthy of a mention. As is NDX 1950, which is where tech held on each of the downside probes in May and June.

A violation of any or all of these mainstay market proxies, particularly in concert, will hold valuable clues to the near-term fuse.

Perspective Directive

I talk with a lot of sharp money managers and while they have variant views on where we're going and how we'll get there, there's uniform agreement regarding the toughness of this tape. Trading these squalls is akin to sucking air through a straw while swimming in a perfect storm. It's not impossible to prosper but it certainly pays to keep an eye on the life raft.

The deleveraging process, while prolonged and painful, will ultimately lead to a sustainable rebirthing of the business cycle. The real recovery-as opposed to the artificial credit expansion we saw on the back of the tech bubble-will be ripe with opportunities for those with fresh capital.

I'm not smart enough to know whether the debt bubble unwinds as cancer or a car crash but I'm seasoned enough to respect that it's an unavoidable reality. Until it does-one way or another-the underlying risk to the system will persist in kind.

That doesn't mean we won't see rallies and runs, it simply suggests that risk management trumps reward chasing and our three core tenets of capital preservation, debt reduction and financial intelligence should remain in place.

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