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Will Chibor Become the Modern Day Sub-Prime?

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China is the dog that wags the stateside tail.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

I'm learning to fly but I ain't got wings; coming down is the hardest thing.
--Tom Petty

Good morning and welcome back to the world's wildest reality show. After a much-needed weekend respite, one that saw the twins depart for camp for the first time - seven weeks! - and an excellent birthday celebration yesterday with my beautiful wife and our tremendous two-year-old daughter, Reality Bites this morning, with or without Winona Ryder and Ethan Hawke.

China got hit 5.3% overnight and that remains the tail wagging the stateside dog. We posited as much last week as the rest of the world focused on the Federal Reserve taper talk, and it remains my view that "Chibor" will become as much a part of the mainstream lexicon as "sub-prime" did five years ago. I may be wrong or early - as this is a movie, not a snapshot - so we'll continue to take our forward path one stair-step at a time.

After actively trading, fading (read: shorting) blips to cover dips, I balanced my book on Friday before slipping into some additional short-side exposure near the close. As it stands and subject to change, I've got a December SPY (NYSEARCA:SPY) put position against defined tertiary longs, one of which is Facebook Inc (NASDAQ:FB) with a stop below $23. Interestingly, I was told by the Gen-Y crowd this weekend on more than one occasion that Facebook is no longer considered cool by the demo that drove the growth.

(Please note that our best and most active content - real-time assimilation and communication - is shared every session on the Buzz & Banter, and you can click here for a free trial. This isn't a shameless plug; we bust our humps in the 'Ville to provide forward-looking analysis and insight. Given the dynamic and ever-changing landscape, the Buzz is where you want to be if timeliness matters to you.)

Given my sense that the S&P will trade to 1500, one might wonder why I'm trading smaller these days; the answer, in a word, is volatility. One of the most valuable lessons I learned coming up in the business is that volatility is the opposite of liquidity (think about when you try to build a position in a thin stock). It stands to reason that as liquidity thins - I have heard from a few sources that primary dealers in bond land are hand-sitting - we'll see increased volatility, which is why I tightened my risk leash as a matter of course.

Be that as it may, and consistent with my stylistic approach, I will nibble on my short-side risk when the market declines and look to put it back out on rallies, so long as the S&P trend-line - once support and now resistance - isn't violated on the upside (technical analysis is a better context than catalyst). I'm alright hitting singles and doubles rather than swinging for the fences; taking a full cut, in hopes of a home run, tends to lead to a lot of strike-outs, and in this business, on-base percentage is our goal.

Random Thoughts:
  • I'm actively trading over on the Buzz, including rolling down some strikes in the SPY.
  • The expiration hangover - as dealers square following the June put and call funerals - will remain in play through most of today.
  • I offered my humble take on the forward direction of gold last week; in short, if monetary policy was going to drive gold higher, it would have done so long ago. The below chart is an updated correlation between gold and the S&P 500 (INDEXSP:.INX).
  • While downside risk remains - carry trades blowing up, margin calls just beginning - I'm hearing that a few gorillas are in the process of shifting their institutional asset allocation models, gearing up to reduce fixed income exposure and up equity exposure. S&P 1550, from what I'm told, is a level for some of these funds.
  • The banks have been heavy from the word "go" today and that's shaping the tape; as go the piggies, so goes the poke. Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), and Morgan Stanley (NYSE:MS) remain solid stateside tells, while Deutsche Bank AG (NYSE:DB) and Barclays PLC (NYSE:BCS) are our overseas proxies.
The current day frustration emerges on two levels. First, the playing field is artificially skewed and traditional metrics have, in many cases, been overwhelmed. I suppose, in hindsight, seeing it and not blindly betting on it is worse than not seeing it at all.

The deeper level of angst isn't about the next five days or five percent. It's about the next five years, or the ten after that, when we pass this baton to our children and wish them well as they weigh the world.

What most folks don't get - and what keeps me up at night - is that this dynamic is cumulative. While a synthetic wealth effect is certainly better than a cataclysmic crash, we must learn from the past or it will repeat with increasing magnitude. It will arrive in waves, with each seismic shock incrementally larger than the last.

Modern day society, awash with zero percent financings, government sponsored euphoria, and the constant transference of obligations from one perception to another, is running to stand still, at best, and swimming backwards at worst. Seriously people, have we already forgotten what happens with risk gone awry?

Moreover, conventional wisdom dictates that the ultimate backstop is in place; Uncle Sam on steroids, flying Bernanke's Apache helicopter with an arsenal of never-ending ammunition. It's an image that makes the Greenspan Put look like chicken feed, a mere pimple on an elephant's arse.

Feel free to dance to the music, but keep an eye on an open chair. While it's difficult to imagine, nobody is larger than the market, at least for a prolonged period of time.

That truth may take some time to see, but it will again be obvious with the benefit of hindsight.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
Position in SPY, FB.

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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