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Random Thoughts: Red Beans and Green Seeds


Risk management is critical, both through the lens of the biggest financial institutions in the world and as it relates to our individual path.

  • You can learn a lot just by watching, which applies to green seeds in a crimson zap or red beans in an upside gap.

  • The red beans this morning? Merrill (MER) (see this level), the semis (ditto) and biotech.

  • The standout action? Nope, not tech---it's the dollar, which is off 70 bips to start the session.

  • Why? While fundamentals "matter," the structural metric--and by extension, the psychology thereof-remains the monolithic mover of asset classes en masse.

  • The following snippet was offered this morning by the sharp cookies over at CLSA:

    • "The banks which added US$120bn to capital per quarter in 1Q07 and 2Q07 added just US$10bn in 3Q07. Credit will be more constrained as unexpected facilities move on balance sheet and as the traditional CP market is less accessible. As credit costs begin to rise, banks will become more risk averse, further affecting tightening credit. This is also the case as non-core deposits account for an increasingly smaller amount of funding. The impact will be negative for US banks and the economy."

  • This is precisely what Pepe Depew was talking about in yesterday's 5 Things. It cuts to the root of the structural concerns that are weighing on the banks and, yes-despite the top-line action in the (dollar denominated) stock market--the economy.

  • Market participants have thus far been able to delineate between tech (albeit with narrowing leadership) and "everything else." Whether that can continue is, in a nutshell, at the crux of our collective financial fortunes.

  • The bulls will point to recent history. The bears will argue that the forces are cumulative. The residual friction is what you'll read about in tomorrow's Wall Street Journal.

  • Yes, it's possible that both can coexist, as they have to date. But Minyans would be wise to pay particular attention to the forces that continue to percolate under the seemingly calm financial surface.

  • Risk management is critical, both through the lens of the biggest financial institutions in the world and as it relates to our individual path. See it, please, regardless of which way you choose to play.

  • What can red do for Boo? Keep an eye on UPS (UPS), which was up a buck and a laugh on earnings. It just flipped the crimson switch and, as this stock is 7.5% of the Transportation Index, it's worthy of a mention.

  • I don't know about you but I, for one, am looking forward to a massive Minyan minglefest to hang with our human capital. There's nothing like a kick-back soiree (that raises money for kids) where we can let loose and talk tape with the Succo's, Saut's, Macke's, Santoli's, Pomboy's, Sedacca's, Dwyer's, Adami's, Cooper's, Goepfert's, Shobin's, Galbraith's, Katz's, Markman's, Reamer's, Shedlock's, Tatro's, Udall's, Zucchi's (and others!) of the world!

  • How do I tell them that due to the unfreezing process I have no inner monologue? I'm not gonna lie to you-this Minyan thing, while a dream come true, isn't easy. It requires a tenacious energy, resolve and commitment that repeatedly tested the depths of my desire over the last six years. And it comes at a cost, as most anything worth having does. I've immersed myself in this mission, for better or for worse, often times at the cost of my own health and, yes, happiness.

  • I offer the above thought in an attempt to remedy the hypocrisy that sometimes accompanies my prose. If I'm going to offer the importance of "working to living and not living to work," I better practice what I preach. Repeat after me. Practice what I preach.

  • Gotta go!

  • Let's see--a massive tech giant reports, beats numbers, rallies smartly and it... doesn't drive the tape higher? Intel (INTC), Yahoo (YHOO), Google (GOOG), Apple (AAPL) have been good for Intel, Yahoo, Google and Apple. And while, by extension, that's been good for tech, it's worth remembering that three stocks are responsible for half of this year's tech gains. That's a nutty strut no matter how you slice it.

  • The obvious tug-o-war is one we've been noting all session---lethargy in the banks and semis vs. traction in high beta. Indeed, today is a microcosm of the broader market dynamic as fund managers weigh sector rotation vs. outright migration. You gotta give Hoofy credit for holding on to the horse as the bears have plenty of excuses to buck the bulls.

  • And while Boo will point to the influence of a proactive FOMC and the drippy dollar, that'll be viewed as sour grapes.

  • At least until it matters.

  • Mounting the Tuesday hump, this is what we know. The S&P filled the opening gap. Market breadth is balanced (surprising given tech, eh?), the Merrill (MER) write-down rumors are getting loud (which I would consider bullish if not for that fugly chart), retail (the consumer) is underperforming, I'm grumpy after 6:00 AM training, the Yankees are very close to fumbling their dynasty, the Raiders have already lost theirs, there's no such thing as too much sushi, I'm really looking forward to Festivus and the only difference between a mistake and a lesson is the ability to learn from that.

  • Other than that, Mrs. Lincoln, how was the theater?

  • Minyan Mailbag


    I am not saying financials don't matter-- of course they do. But when you can't turn on the TV and hear "overweight energy/ underweight financials," doesn't energy matter most?

    -Minyan J


    Great question.

    The answer is "yes and yes." Financials matter most, in my view, because they're A) the highest weighting in the S&P and B) an encapsulation of our finance-based economy. And given the $500 trln of derivatives and the interwoven nature of credit, any fire will begin to smoke there (hence, as goes the piggies, so goes the poke). And it's why the "poke" lower (2007 lows) in the BKX continues to warrant attention (in my humble view).

    Energy, through a leadership lens, is also an important tell. And I'll group crude into that as well. I said on television Friday that I was more concerned with a precipitous drop in oil versus a continued rally, and that, while $90 oil is clearly taxing on the consumer, the "rising tide" of a lower greenback has been the driver (along with every other asset class) of dollar-denominated assets. Oil didn't "matter from $30 to $85, so I just don't buy that it "matters" now. Well, it does on the margin, but not as an absolute catalyst, not in a multi-linear equation.


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