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Random Thoughts: The Path of Maximum Frustration


Making sense of the global potpourri.

There are moments in life that make you stop and think. Yesterday, I had one of them.

Minyanville's Michael Comeau posted a Buzz yesterday that highlighted this interview with Michael Platt, founder of the $30 billion hedge fund BlueCrest Capital Management LLP.

Among other juicy tidbits, Mr. Platt-who has absolutely killed it over the course of his career-offered that most banks in Europe are technically insolvent (sound familiar?) and the situation will worse in 2012 as the overseas debt crisis accelerates.

His main fund is essentially in cash-safety plays such as U.S Treasuries and German bunds-given his concerns surrounding market volatility and counterparty risk. He is not buying assets put up for sale by banks that are trying to deleverage due to liquidity concerns. "I would not touch them with a barge pole," he told Bloomberg, "the major opportunities will come post-blowout."

That sentiment struck a chord as well, for obvious reasons. I've been of the view-and remain of the view-that we've got some tough sledding ahead for the next few years but the back-half of this decade will offer opportunities unlike any of us have ever seen in our lifetimes-the type of opportunities that we would be seeing now if free-market capitalism was allowed to dictate a natural course.

So why, you ask, have I been more pensive than usual given another proof point that is consistent with my own thought process (Paul Tudor Jones also offered one last month)?

Simple-I want…no, I need to see the other side of the trade. If this super-smart $30 billion gorilla is "all cash" and hedge funds across the globe are in "risk off" mode after trailing the returns of U.S Treasuries, what does that portend for the path of maximum frustration?

This is all food for thought, quite obviously, but they are thoughts that need to take place. The market hasn't been free for a long time and as we wrote in 2008, when Martial Law was declared, "the rising tide will lift all boats in front of the perfect storm that awaits. It may have been pushed out on the horizon but it's there-and now it's really mad."

I believe it's still there and it's still mad, but that's the easy part; the tougher trade is what happens between here and there.

Viewing the dew through a stair-step lens, the S&P (potentially bullish) reverse head & shoulders pattern remains in play above S&P 1210 (the recent lows) and will trigger, if and when, with a move through the 200-day moving average in and around S&P 1260. Should that occur, through a pure technical lens, the tape has room toward S&P 1350. It's very much an if-then scenario, mind you, but again, it always pays to see both sides.

Random Thoughts:
  • I entered today with a small long position in Research in Motion (RIMM), which messed the bed last night when they pushed out their pipeline, and the stock is getting crushed. As a matter of (trading) course, I doubled down on my bet and bought stock at $13.20, although this is a pure trade and I will treat it accordingly.
  • Tom Petty isn't playing the East Coast during his 2012 World Tour? That can only mean one thing-ROAD TRIP!
  • If you missed the Festivus recap, here it is! If you missed the LOUIS XIII auction to benefit children's financial literacy efforts-you didn't, there are four more days, and here THAT is!
  • Gun to head, we'll trade higher today but manage risk rather than chase reward, if you choose to play that way. We will, as always, update our vibes in real time on the Buzz & Banter (which has a two week free trial for newbies).
  • When the dust settles on the commodity puke (forced selling by toe-tagged funds), I believe we'll see a bifurcation in that space, with food and grains outperforming the metals (ex-palladium) and perhaps energy.*
  • The asterisk above is an important one; consistent with the tricky trifecta we spoke of for years-societal acrimony, social unrest and geopolitical conflict-the final phase of that is seemingly on track to arrive.
  • If and when that manifests, crude has a massive gap risk higher, which is why I'm not betting on that until someone tells me which dynamic "wins": deflation or war.
  • I'm told that the effects of the Japan earthquake are very real and will have a 30-year half-life.
  • China will continue their attempts to ease; they, along with every stateside policymaker, fear deflation more than inflation, but they will not let their currency appreciate.
  • Brazil, while good at waxing, is otherwise unbalanced, with cronyism, corruption and inflation fighting for pole position.
  • I'm told India is short on coal and oil.
  • The ECB and Germany can't both win; let that one marinate for a while.
  • I foresee a "trimmer" European Union; it will be a painful path, but a stronger, more unified Europe will emerge.
  • Has the Spanish housing market been marked down yet?
  • Mr. Sarkozy, enjoy the holidays; they'll prolly be your last while in office.
  • Jeff Saut once told me--at MIM2 in Ojai--that water will be the most precious commodity. I believe he'll be correct with that view.
  • Smile, friend; it could be a LOT worse and for many around the world, it already is.
  • Enjoy the weekend, and we'll see YOU on the other side of our requisite respite!

Twitter: @todd_harrison

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Position in RIMM, S&P
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