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War Games

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The problem that comes from engaging in high risk behavior for which the consequences are absent, even if only temporarily, is that such high risk behavior begins to appear normal...

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"May I have your attention please. Mr. Hunter has brought it to my attention that morale may be a bit low. That you may be a bit…on edge. So I suggest this. Any crew member who feels he can't handle the situation can leave the ship right now! Gentlemen, we're at DEFCON three, war is imminent. This is the captain, that is all."
-Capt Frank Ramsey, USS Alabama


Good morning and welcome back to the Crimson Tide. With the world on edge and traders tickling the trigger, we're asking Minyans to stand up, calm down and keep their cool as the tape torpedoes into the Laurentian Abyss.

Emotion is the enemy while trading - we've learned this discipline through bubbles and busts - and it only takes a momentary lapse of judgment to put a damper on our day.

It is with this collective call for calm-which is quite different from complacency-that we ready ourselves for battle. Proper preparation always precedes a profitable process. And junctures like this put that process to the test.

Chief of the boat, what say ye?


  • We've been watching S&P 1375 for the last few weeks as a beacon in the night and a level for the fright. I don't know if we get there on straight line but my sense is that Hoofy has some counter-measures waiting if we do.

  • We've long offered that the fiscal and monetary stimuli given to the patron (the US consumer) on the back of the tech bubble was akin to giving a drunk another drink so he doesn't sober up. The credit crunch and debt-dependency is indeed sobering but the first step towards solving a problem is admitting you have one.

  • We touched on these topics while mingling in the Mountains two years ago. Some other pertinent themes that, while early, seem to be manifesting include:

    • In the absence of water, people are so thirsty that they'll drink the sand. With only a handful of platforms serving up financial news-and with many of them focused on ratings and advertising revenues-it's easy to see why fiscal literacy is lost in translation.

    • In an age when lightening rounds pass as value added financial content, I'll offer that there is no such thing as a quick fix.

    • They say that you're only as good as your last trade. In 1999, ten percent returns would have triggered redemptions and those same results would have won a gold star in 2000.

    • At some point, the collective mindset began to view profits as a right rather than a privilege.

    • There is a difference between legitimate economic growth and debt-induced demand. Our friends at the Federal Reserve know that the stock market is the world's largest thermometer.

    • The only difference between intervention and manipulation is communication.

    • "Yes, the economy is growing but why? Because real estate speculation is driving growth. Why? Because long-term interest rates remain low. Why? Because investors are still buying financial assets. With What? Liquidity that is being created by more and more debt." Professor John Succo.

    • Seeds of discontent continue to percolate under a seemingly calm surface. We are the world's largest debtor nation (total debt is over 300% of GDP), levered to home equity and dependent on a low cost of capital.

    • Either the US dollar must further devalue, as it has to the tune of 25% (now 32%) since 2002, or asset classes will deflate.

    • As we edge through the new world order, our economic ranks and societal structure will continue to shift.

    • The middle class is steadily eroding as we balance the lifestyles of the rich with a struggle to exist.

    • As this dichotomy manifests, the implications for consumer spending, real-estate investment and long-term savings will be profoundly impacted.

    • There is a difference between being branded a bear and being conscious of the landscape.

    • A complex maze of derivatives has tied together the balance sheets of the world's largest organizations.

    • With the emergence of bearded financials such as General Motors, General Electric and Ford-all of which have considerable finance arms-it's quite possible that a ripple in Fannie Mae or JP Morgan will have an exponential impact across a wide array of sectors and industries.

    • The problem that comes from engaging in high risk behavior for which the consequences are absent, even if only temporarily, is that such high risk behavior begins to appear normal, and the entire scale of risk gets adjusted and pushed out.

    • There is a tremendous risk between respecting the price action and deferring to it and that's the bottom line when assessing risk.

Alas, there's much more meat in there, but you get the point. While many in the mainstream media offer these thoughts as "breaking news," the conditional elements have been cumulatively building for years.

There is no quick fix on this long road, only awareness and redemption. If we each do our part and manage risk (rather than chase reward), the system will slowly alleviate the structural imbalances in place.

In other Random Thoughts…

  • Minyanville is "officially apolitical," which is to say that we steer clear of political rhetoric unless it has a direct effect on the financial fray. That relates to electoral influences on specific sectors or implications of the changing of the guard.

  • Last night, while at dinner with someone who knows quite a bit about the Beltway, I asked whether the cracks in the Washington cronyism-from Rumsfeld to Wolfowitz to Rove-was in anyway related to our current market crunch. His response was interesting. "When the generals are leaving the battlefield, the troops must fend for themselves."

  • After trading from the short side the last month, I punted my puts into yesterday's opening and proceeded to get nicked by a few paper cuts during the whippy trip. When that happens, I like to flatten out and take a breath rather than press, guess and otherwise stress.

  • It's funny, ever since we sang Redemption Songs yesterday morning , it seems like I'm hearing Bob Marley all over the place.

  • While market breadth is 3:1 negative, the money centers (BAC, C) and Bear Stearns--along with Fannie and Freddie--are showing early relative strength. Watch these please as the banks test the double bottom at BKX 101.50. THIS IS THE TIGHTEST BOVINE BACKSTOP FOR BULLS LOOKING FOR DEFINED RISK.

  • Mea culpa on my late opener today as I've had some system issues. Do you have any idea how frustrating it is to write three columns and have them poof! into cyberspace? I do. You know what else? It could be worse and for alotta folks out there, it is.

  • Maintain perspective and keep your right hand up and remember that, no matter what your bottom line says, you've got it better than most.

  • Lemme hop the fence and join the Buzz. Fare ye well as you truck through the muck.

R.P.

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 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.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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