Technical Reversal Before Fed Decision on June 28th, 2007

The S&P future, after narrowly posting a new June low before SPX cash opened, proceeded to rally the whole day and broke the high of the previous day posted @ 1519.25. This is a technically bullish development, and combined with the bullish divergence that has been seen over the last 2 days, I think the market will stay strong into month-end, barring any unforeseen hawkishness from the Fed tonight...

Upside resistance in the SPX Sep futures is at 1529-30, support is in the 1508-05 area. Buy weakness, especially toward those support levels, would be my preferred intraday strategy today.

Recovery Doesn't Mean We Are Out Of The Woods Yet...

I've been away for a month and, lo and behold, the market has recovered 50% of its losses and it all seems to be back to peachy and rosy paradise to some. Not so fast... To get back into bullish territory, the S&P 500 Sep06 futures would need to take out the 1305 level on a closing basis, which seems to be a world away right now (have you noticed how poor the NDX price action is?). Until then, I suspect it's going to be a range-bound market with the 1259 support and 1,300 resistance confining the market in its summer doldrums. Most people are on vacation and volumes are extremely thin. Not the best time to put on risk right now, unless one has 100% conviction, which a lot of people don't (including me), as far as short-term bouncing-around is concerned... Stay tuned for more when I notice people waking up. BofJ ZIRP decision this Friday -- maybe that stirs things up a bit...

Full-Blown Correction Under Way...

We called it right. This is more than just a blip, squall, or whatever the inane buy-the-dippers want to call it. This is a full-blown correction, which is well on its way of taking the SPX down to its bull trend line at 1225 (cash)... The break of that will probably freak out a lot of the CNBC pundits and the retail trader community alike. In fact, there has been a tremendous increase in the volume of odd lots traded lately on all the major exchanges -- implying that your average Joe Schmoe is pulling their hair right about now, stopping himself out... Back to 2000 anyone?

Let's not forget it's also World Cup time (that would be soccer, for those of you living in a cave). If history is any guide (2002, 1998, 1994, etc), this "blip" (I call it full-blown correction), has more legs to run. Don't catch a falling knife. Watch emerging markets for guidance. Once they stop falling, it may be time to finally ship some risk in. Until then, don't touch this treacherous market.

Not Over Yet...

The market predictably bounced from major support just below the 1,250 level in the SPX, but it's hard to see how this can represent any sort of meaningful "bottom"... The World Cup is just around the corner, and if you are a football-mad investor, you are probably going to make sure you won't spend the majority of your time in front of the computer screen. Hence, I think volatility will continue to be high and liquidity will dry up. Which means one thing: small sell (or for that matter, buy) orders will start pushing this market north and south, like there is no tomorrow -- with the likely direction of equities down. Risk reduction continues. I sense a lot of the big long-only elephants haven't even begun to reduce their exposure. So more trouble ahead? It sure looks that way.

More Like 5:0 To The Market...

I've been off for a few days and lo and behold, the "fakeout" I talked about in my last posting has developed into a full-blown rout!! This is MORE serious than just a "healthy pullback" -- that's right, this may well be the start of a much deeper correction, which would eventually take us down to below the 1,200 level in the SPX (which would make it a 10% correction -- as I surmised earlier -- from the highs just above 1,330).

We have seen capitulation and liquidation of all profitable (consensus!) positions out there -- from $ and bond shorts, to commodity and equity longs!! It's fast and furious as well, so don't try to catch a falling knife, please - you've got macros and long/short funds in real distress here, pushing this thing down...

Yep, Fakeout It Is -- 1:0 To The Market

All I can say is: thank God I am not in this whipsaw market. Whenever equity bulls get too worked up about rising prices, this is exactly the sort of day we need to pour some ice water on their hot "we are so bullish we could cry" feelings. On Monday, I made the same point, thinking that the recent equity gains may well turn out to be nothing more than a first of many more to come "fakeouts". The strong headwinds remain and I just don't think the inflation scare is out of the way yet (have you seen commodities lately?). Tread carefully here. This may well be the beginning of a significant equity markets correction.

Breakout or Fakeout?

The S&P 500 index seems to have made its mind to go higher, no matter what geo-political and structural/earnings and/or Fed tightening concerns there may be out there. Friday's was a very positive weekly close, but one early bird doesn't a sunny spring make. So let's see how this month turns out to be, because equities are still facing some significant headwinds, going forward. In fact, there is no evidence to suggest that when the Fed does stop or "pause" raising rates, equities are supposed to go higher. The inverse may in fact be true. I don't trust this "breakout" yet and will sit on the sidelines until I convince myself that this rally is for real.

The Dollar Looks Worse By The Day...

After falling another 2% [against particularly the yen, euro and the pound] since I posted those comments last week, the dollar selloff looks to be done for now (short-term), before the Fed meeting next week. However, we are a long, long way from wanting to buy the greenback. It may just be a period of consolidation before another leg down. To the best of my limited technical analysis abilities, I see downside to 109 in the $/yen and upside to 1.2750 in eur/$ (weekly closes), before the dollar bulls can perhaps emerge from hibernation. Six months ago, dollar bears (including me!) could get no respect -- now, they are definitely back in fashion!

The Beginning Of The End For The Greenback...?

In the last 2 weeks, the USD sentiment has gone from mildly bearish to extremely bearish, with the primary hits coming against the yen and the euro (the latter two being up 4% and 3% against the 'ole dollar, respectively). What's even more disturbing is that all of this is happening while the U.S. treasuries are taking hit after hit, pushing the 10-year yield above 5%. In other words, no longer are interest rate differentials of any importance for the greenback and structural considerations (current account deficit, etc.) are back in fashion. I think we are at the brink of an intense and super-violent USD correction -- much, much lower from here.

On another note, watch the SPX (S&P 500) over RTY (Russell 2000) outperformance, going forward. I think the time for the small caps is over -- they are expensive, illiquid and overbought. Their P/E ratios are astronomical when compared to the large caps cheap-as-chips valuations. I've been telling all my friends about this trade -- it is going to be a winner over the next couple of years! Watch this space.

Time For Large Caps?

The small-cap dominated Russell 2000 has outperformed the S&P 500 by over 40% in the last 3 years -- valuations being driven up and up by private equity firm deals, plentiful sloshing liquidity and virtually no fear from what's happening out there in the macro world. All of these favorable circumstances are coming to an end. Hence, I would like to propose going long SPX @ 1310 and going short RTY @ 772 for the foreseeable future. This trade will work wonderfully if we are indeed going to face a 10%-15% equity market correction driven by growth and/or inflation scares. Watch out for warning signs from small metals and mining companies (within the Russell 2000) -- the valuations of those have outpaced the gains in the commodity market by a good margin, and in certain cases are trading at ridiculously lofty multiples.

Metals Meltdown...

The high-to-low range of silver today was 20%. A bit of old-style volatility, to put it mildly... The contagion effect spilled into gold, palladium, copper and a few other base metals. This was to be expected, as there was virtually no short base out there (to provide short-covering support), and, consequently, any long liquidation, given the stellar performance of these metals year-to-date (silver being up well over 50% YTD until this morning), would have been met by nothing but empty air.

Nobody and I mean nobody can tell me that they reaaally know the fundamentals of those metals. It's just a pure speculative thing of hot money chasing something quite illiquid and in limited supply. These markets are therefore very prone to corrections like this and while one can make the usual "China argument" about "every metal" going through the roof, one needs to be careful and see at what price one is buying all these volatile commodities. Otherwise, it's just a greater fool's bubble -- of the 90s-Internet-type. Caution is needed, as the market taught a painful lesson to a lot of overly-exposed commodity funds today.

Take The Gains From The First Week of 2006 OUT...

... and we get a flat market for the year!! That is an amazing fact, given all the hoop-la going around about earnings, strong growth potential, etc. Well, it would seem that not all is well -- I have never seen gold and oil spiking through the roof and equities going up as if nothing was the matter. Even with all the talk that the Fed may soon be done (at 5%), the market just can't seem to muster enough strength to take off from here. I've been thinking about going long large caps (say Dow Jones Industrial Average) against shorting the small caps (Russell 2000), purely on a fundamental basis. I simply can't see how small caps can keep delivering in the current macro environment, M&A or no M&A activity. More on this a bit later when I do my homework...

Well, Easter Week NOT Boring Me To Tears Anymore...

It seems the S&P 500 has decided to start rolling over and get some people spooked. The break of 1,300 on the June futures side was a psychologically important factor. Coupled with the fact that some important technical indicators are starting to (negatively) diverge, oil is trying to break $70, the Fed doesn't look like it's pausing at 5% (though I think they WILL!), the market seems to have knocked the confidence out of the screaming-head bulls, at least for now. I expect us to retest the SPX 1,275 cash level, which is the 100-day moving average support that so many Americans are obsessed with, before we decide whether this bull market is over, or is set to continue into the summer. Until then, I've got nothing to do, and I am glad I sold my longs last month close to the yearly highs.

One negative indicator I would point to is the proliferation of these inane TV fantasy equity portfolio trading challenges, such as that Squawk Box nonsense -- the interest in that has been immense!! If that is not a sign of a toppish equity market, I don't know what is! Reminds me of the 2000 equity mania all over again. Stay alert!

Easter Week Is Boring Me To Tears...

Clearly, the market has decided to take a much-needed breather after a bunch of important economic news last week, which culminated in the equity mini-massacre last Friday. As you know, having sensed a whip-saw type of action for some time now, I have been well out of this mess, and am quite pleased about it. It seems all the action is concentrated in the commodity markets anyway!! Silver, gold, zinc, copper, nickel (to name a just a few!) are making multi-decade (!) highs and it doesn't look the party is going to be over there any time soon!

So, dear Fed big-ivory tower thinking honchos, if there is really no inflation in the economy, why are precious metal prices going through the roof, and equities are unable to rally in any meaningful way (hence my being out them)?? Answer me this, Ben!

Buy/Sell Programs...

Yes, they are the bane of this market. Today was a prime example of how shorts got themselves stopped out above 1,320 in the SPX June futures (with the high of the day being 1,324) before a global sell-program leaned on this thin market and pushed it down a full 1% from the previous day's close, and just about 1.5% from the intraday highs!! This is what I call a total massacre, what technicians frequently refer to as an "island reversal technical pattern", and what surely left a lot of hedge funds/speculative accounts nursing a sore head after a long week. The decent NFP numbers were only part of the excuse. Inflation is still all around us despite the best efforts of the U.S. government and the Fed to convince us otherwise. I am still mighty glad I am out of this market -- one can get whipped around like a milkshake in this see-saw type of price action. It is probably time to think about shorting the SPX after all, if next week doesn't bring respite to the bulls (which looks highly unlikely at this point!)

Time To Resell GOOG?

GOOG's SPX index entry seemed to have done the trick and put to sleep a lot of people who would have otherwise sold the stock in the mid-300s. I, for one, haven't changed my opinion and would be looking to resell GOOG, should it start to move a bit higher (3-5%). $425-$430 seems to be the level that most bears are thinking about. At first glance, it indeed looks like a nice one where GOOG stock realists can start re-initiating shorts.

Otherwise, the market refuses to go down (or up for that matter) ahead of the NFP numbers this Friday. I am in the "one more and done" Fed camp, so for what's it worth, I believe we are close to an inflexion point -- volatility across asset classes is about to explode... Just ask the FX dudes who were short eurusd gamma ahead of the eurodollar's recent upside breakout on good volume. Stay tuned.

The More I Look At This Market...

...the more I am glad I am out of it. I sold my equities longs right around here and I see the market has basically stalled, and is currently in waiting mode -- for what or for whom, I don't know. What I do know is that the market is entering a seasonally weak period (April-September, 2nd and 3rd quarter) with mid-term elections in the U.S., tremendous geo-political risks and uncertainty as to the Fed's stance on interest rates. I am starting to look for a good place to short, just as everyone is getting bulled up on the prospect of a continued strong U.S. (and global) economy. Yeah, goldilocks lives on in the minds of some wishful thinkers.

From what I can see on the charts, the SPX should be shorted aggressively between 1,325 and 1,340 with a target of... oh 10% lower, around 1,190-95 or so. That would wipe off a lot of lazy bulls' P&L from the previous quarter, but it wouldn't be anything more than a healthy hiccup in my mind. I am still waiting patiently for the last hurray from hot, performance-chasing money.

Don't Fight Month-End Performance Chasers...

The equity market looked like topping out yesterday, but I would wait a few more days before deciding on direction of breakout. Month-end flows have a notorious tendency to squeeze out the weak hands (in this case, the shorts!). I wouldn't short into this strength until mid-April, at least. Wait and then wait some more.

The Darling Of The Emerging Markets...

Brazil has been taking massive hits in the last 2 days. The currency is down over 5% since rumors about the resignation of the finance minister Palocci surfaced (and proved to be correct). The new guy, Mantega, has some whacky ideas about interest rates and is making some investors very nervous. I had already pointed out that the end of the carry trades is near, and I continue to believe this to be the case, especially now that the ultimate carry trade darling, Brazil, seems to have fallen out of favor, at least in the short term. Risk reduction seems to be the theme of the day. I expect this to continue into month-end [this Friday], which also coincides with the Japanese fiscal year end -- one more reason why volatility (across all asset classes) should pick up between Ben's Fed announcement tonight and Friday.

Dollar Bulls Making One Last Stand...

... On the back of one strong existing home sales number? Surely, you must be joking... The dollar needs a correction -- a downward correction. Why do interest rate differentials matter when, clearly, the greenback has some tremendous structural issues... It beats me. In any case, today wasn't a good day for eurodollar (FX) longs. I wouldn't despair yet though. I think we see 1.26 before the end of next quarter. I don't think it matters much where the Fed goes, as long as the ECB follows.

Equities? If you are long, you should be selling on any spikes up. If you are flat, wait on the sidelines like me. If you are short, you are wasting your time and money for now, though I do expect you to be right eventually... again before the end of next quarter. Options offer a better risk reward than outright cash positions... what with volatility being cheap as chips. It may well be a much smarter way of playing the inevitable correction, rather than sitting on the edge, waiting for the stop-loss call from your glib broker. There's just too much hot money chasing returns in this environment. I hope Bernanke recognizes that and dries up this really annoying, stale global money-liquidity pool in which we have been sloshing around ever since 9/11 practically. He shouldn't wait for the stench from that pool to overpower the world's financial system. Liquidity-driven growth is no growth at all... It's like pumping heavy iron on steroids, when your muscle just isn't ready for the weight. Ben, please, let's not wait for the "injury" to occur before you administer "the medicine". Act now!

The Market Sucks In People And Then Drops Precipitously From The Highs...

Typical. Can't say though that it wasn't predictable -- I had already said that it was time to reduce longs and think about opportunities to short. Am not saying that the market cannot go higher -- in fact, it probably will, as all mature bull markets overshoot, as they tend to suck in performance chasers/momentum "monkeys" to jump on the gravy train. The smart thing though is to wait on the sidelines when things seem out of whack. And things have seemed out of whack lately -- emerging markets have weakened, bonds have sold off, and people are still quite unsure as to where Bernanke stands.

Speaking of Big Ben, anyone who read his speech from the other day would conclude that the man not only has a bigger ego than Greenspan (if that's at all possible); he also likes to "talk", just like any gifted academic. Greenspan mumbled, and in his mumblings, there was something for everyone. In his effort to be "clearer", Bernanke basically sounds more confusing... Counterintuitive, I know, but that's the way it is unfortunately. Hence, bonds sold off, and so did equities with them, after the latter didn't manage to break technical resistance at recent highs (1310-11 in the SPX -- the upper end of my March SPX target). It's tough to be short out there, I know, but it could actually get a bit easier during the next quarter. Stay tuned.

Don't Force It...

I've got to tell myself that all the time these days. I am back from the EuroHegde conference in Paris. I thought I was being controversial there, when I said at the global macro panel -- chaired by Gavyn Davies -- that I expected the SPX to have a correction of about 10% from above the 1,300 level down to about 1,200, give or take. I half expected to be hurriedly shown out the door for uttering such preposterous (in an apparent "bull" market) nonsense. It turns out that my fellow panelists, Landsdowne's Richard Davidson (a fellow Morgan Stanley alum) in particular, didn't really disagree with me, which made me nervous!! I hate being part of the consensus view, no matter what that consensus is!

Anyway, be careful out there. It's pleasant and sunny today, but it might well rain or be stormy tomorrow. I don't like the market here, which explains why I am getting out of my longs at these levels. I called it right, but just because I called it so, doesn't mean that I agree with the people who are making my trading view come true -- it's called going with the crowd, for now. Too many people think that the U.S. is in a goldilocks economic scenario (low inflation, great growth), when in fact the business cycle in the U.S. is late-stages mature (almost 4 years now). Look to Japanese equities, some smaller southeast Asian markets and perhaps China (which looks good value to me here) for outperformance this year. The U.S. is going to suffer this year. I am convinced about it, but I am certainly not going to be the first one to short the market (and get taken out, feet first, in the process!!). Wait, wait, wait some more and don't force it. This is my mantra these days. Enjoy your weekend.

SPX Target Reached... Selling 1/2 Of The Position Around Here

My March target for the SPX was reached today. I am selling 1/2 the position around these levels -- 1,310 in Jun06 futures, as I think the market might overshoot a little bit on the upside, but then again, it might not... Also, let's not forget it's expiry week and weird things can (and probably will) happen. It would seem the market likes lower yields and the slight possibility that the Fed may soon be done with raising rates (which isn't true, but hey, who am I to go against the inexorable trend). So I take profits and run, but mind my words: we are soooo close to a 10% correction in the U.S. (and Europe) that it's not even funny any longer. The market has forgotten all about fear and complacency (together with the M&A bonanza) rules for now.

I am off to Paris for the EuroHedge conference this Wednesday and Thursday, where I will be one of the global macro speakers on a panel chaired by ex-Goldman's Gavyn Davies. Back on Friday. Sell on strength (if you are long) and just watch on the sidelines if you are not! And yeah, if you are a $ bull, you might want to consider looking for a safe place to hide...

M&A Bonanza And Its Implications...

Sometimes I wonder whether the recent surge in M&A activity (both in the U.S. and across the Atlantic) is not going to spell the end of the 3.5-years old bull market -- just like it did in 2000. It's not just one or two sectors but it's actually across the board -- companies are simply wallowing in cash and are sallivating to throw money at juicy morsels of business.

As you know, I view all of this with great suspicion. History does repeat itself as people do make the same mistakes over and over again. The Fed is still raising rates (and some savvy observers even think they are not even close to stopping), which should increase volatility, which, in turn, should make the market environment a lot less savoury than we've had it for a while. Bernanke's Fed may well be trying to administer a painful medicine to asset price inflation (read here stock and real estate markets), which hasn't worked so far. I don't think the Fed will lose this fight... Do you?

NFP Numbers Decent -- Hence Back To Complacency...

The NFP was a non-event (243,000). With exception of a little volatility in fixed income, the rest of the asset classes, especially equities, took the number in their stride and just proceeded to rally, almost as an afterthought. My target for the SPX remains the same. I am still mildly bullish but I have taken my bear jacket to the cleaners around the corner (no pun intended) - I will be getting ready to put it on some time early next quarter.

One mildly amusing note: the market is looking grrreat right now, but the darling GOOG simply can't rally -- it's trading at a $333 or so, which is a 6-month low; in fact, it has closed its breakout gap here from its 3Q'05 earnings. So, GOOG is not looking so healthy -- I sense a little desperation from the longer-term holders who are obviously finally trying to get out of the name at these levels -- hence, I will be putting some cheeky bids soon, just like I said before, in the low $300s. GOOG volatility is still a bit too high for my liking to get involved with options -- one-year at-the-money vol is around 42% right now, I need it in the mid-30%s before I start to get interested to play direction through its options.

Emerging Markets And Commodities...

Yesterday, we witnessed the first major hiccup of 2006 in the 2 most sensitive (to carry) asset classes -- emerging markets (FX) and commodities (base and precious metals). If you were long any of those, you experienced some serious pain, as there was a general risk reduction going on in the market, which ended up shaking a few of the very popular "hedge fund trades" -- the so-called carry trades. I continue to believe that the end of ALL carry trades is nigh -- it will probably start (and some may argue that it already has) with account deficit countries such as Iceland, and eventually make its way toward pretty fundamentally strong economies (with account surpluses) such as Brazil. It's just a matter of time.

Equities are ploughing along happily for now -- I am still very near-term bullish, but as usual, equity investors will be the last ones to feel the pain inflicted by other asset classes. So all is alright for now, but prepare for pain later on next quarter.

GOOG: The Nonsense Out Of There Just Doesn't Stop Rolling...

According to Reuters, "Google inadvertently published outdated profit margin and revenue projections on its Web site last week during its annual analysts' day, the company said in an 8-K filing on Tuesday. But it stood by its refusal to issue financial projections. The Web search leader said speaker notes that were posted to its investor relations Web site were inaccurate depictions of its financial outlook".

What next? "We had a great quarter -- oh, no -- just kidding! We missed! Oh, not really! In fact, please ignore everything we are saying". I repeat, one can't trust Google any longer -- one-trick-pony business model and too much fluff behind the hype.

Carry Trades Revisited...

I was away for a couple of days and when I came back -- I found that, lo and behold, 10-year treasury notes are out of their 6-month range (4.30%-4.67%), the yen has taken a massive beating, equities have had a decent pullback from overbought levels and, most importantly, all kinds of emerging markets and carry trade favorites (from Brazil to South Africa) have been taken to the cleaners (well... relatively speaking at least to the level of complacency that we have seen in recent weeks!).

Part of the reason for all of this has been, of course, the realization that the Fed might not stop until we see rates well above 5%. This tends to unnerve people who are running a lot of risk (and are thus are sloshing around in the global pool of warm liquidity - courtesy of the worst central [now retired] banker in history Mr. Alan Greenspan): so, what we have seen in the space of the last couple of days may just be a general reduction of overall risk. Still, it's quite disconcerting.

I would stay on the sidelines for now. Again, there is going to be plenty of time to get on the fun train of unwinding ALL carry trades -- should that case materialize. Virtually the whole world is long carry. The market may well go where it sees the most weakness...

Retailers Weighing Heavy On This Market...BUT

The Morgan Stanley Retail Index (MVRX) closed at an all-time high yesterday ($169). How it got there I have no clue, considering the fundamental problems of the U.S. consumer. It would seem most of these retailers front-loaded their quarterly sales in January, discounted them heavily and also benefited significantly from much warmer than normal weather-induced store trafic. Is the party over? For retailers perhaps, BUT for the SPX though -- far from it I reckon. I think we will take out 1,310 this month, as I suggested some time ago in my better-than-50/50-chance commentary. Until then, buy-the-dippers will probably dominate. Too much money/cash is still sitting on the sidelines.

Does One Need Any More Reasons To Stop Trusting This Company??

Yes, I am talking about my favorite short GOOG. As suggested a few days ago, I expected the stock to retest the $385-$400 resistance area before making its way down to the low $300s. What I didn't expect is for them to drop a bombshell like this on the market and make the whole "going down" process easier -- and all this happening just 2 days before an analyst day. Their CFO Reyes (who, by the way, is the namesake of a very good Spanish soccer player at Arsenal with a tendency for diving... hint... hint!) dropped the ball today announcing [in the middle of the trading day] that Google's growth is slowing, and that the company needs to find new sources for revenue. Whoever didn't know that already and was long the stock because they thought it was er.. "cheap".. must have lived in a cave for a while. Welcome back to Earth, mate. As this blog has long claimed, you will be hard-pressed to find a more obscure and arrogant company than GOOG (as far as its communication with the investment community is concerned), masking in false humility. Oh well... the market always "gets" those in the end.

Better Late Than Never...

For this one, I am going back 4 months. After a classic accumulation pattern on the charts, CVC is finally starting to wake up. I was a buyer @ $24.25 back then. Not my best trade, but, hey, if CVC is starting to deliver on its fundamentals (primarily new customers growth) -- trading at $26.50 today, I'll take it, in the absence of any M&A worldwind storties.

I am also taking profit on the short EURISK vs. short USDYEN (or long yen calls in other words) trade -- for a net gain of over 6% in just 4 days (81.75 to 78.50 and 118.60 to 116, respectively). Not bad in FX land for a funky carry trade, which is not really a carry trade.

What A Disaster Of A Trade...

I seem to remember (with some trepidation) that I wanted to go long property and casulty insurers (S5PROP) against shorting the banks (BKX). I've had much better ideas than that lately -- such as shorting GOOG and the short EURISK vs. long JPY trade. We live to fight another day, as they say.

Speaking of GOOG, as I expected, it's getting to the resistance area of where most bears would love to sell it again. More on that later, but until then, stay alert!! And of course, have a good weekend! Yeah, that includes all of you, Chelski sore losers, as well...

Short EURISK vs. Short USDJPY Revisited...

This trade is up well over 4% in just over a day (short EURISK from 81.73 [trading at 79.30 today] and short $/yen from 118.60 [trading at 117 today]). This is huge in FX land. I repeat -- one of two things will happen this year: EITHER 2006 will see the end of ALL carry trades OR 2006 will see the end of the YEN carry trade. Hence, this trade makes sense, especially from an ISK oversold level (as indicated in my posting yesterday).

(Possibly) A Nice Little Trade...

Let me jot this down before I forget it. I think all kinds of carry trades this year will be unwound, but not before the marketplace has a chance to see what Helicopter Ben is really up to. Until then, it's perfectly alright to have something like this: short EURISK (euro-icelandic krona which is up 8% in the last 2 days because of a Moody's downgrade) against long some out-of-the-money yen calls (against the $). ISK (the Icelandic Krona)'s carry is something like 8%, which in the short-term is going to compensate investors for the risk of being long the krona against the euro, especially after a big, big ISK selloff as the one which we saw in the last 2 days. Should anything happen though, the cheap out-of-the-money yen calls should provide adequate protection against a more sustained liquidation of carry trades, because the first major currency to benefit from the carry trade unwinding is going to be the yen.

CNBC Starting To Tick Me Off...

... with their biased (bullish) coverage. WMT reports crappy earnings. But no, let's talk about HD (which is a smaller component in the retailers' index) instead, which had fantastic earnings. Little wonder pre-market futures were completely on the wrong side as cool heads came in and sold this market as soon as it opened. What is CNBC playing at? I know they are a crap network with moronic talkingheads who have no clue about anything, but it's one thing to be a cheerleader when there is something to cheer about, and quite another to basically "hide" or "under-report" negative news. One more reason to be bearish longer-term as inane retail investors will for sure swallow the bait and buy this market at the top. Still, I stick to my 1,310 target in the SPX before we see a significant correction in the marketplace. We are heading up full speed toward a massive cement wall. I will enjoy the resulting wreckage. Buy 18-month volatility.

The Much Maligned [Lately] GOOG Bounces While PXRE Group Slides 70%...

Predictably, after getting "leaned on" in that spoof-financial magazine called Barron's, GOOG bounced from $335-$345 after cleaning out the weaker hands who bought at the very top (above $450) and then panicked when the going got tough... The stock looks destined to retest $385-$400 in the short run before eventually heading lower towards the low $300s.

How about that reinsurance former hedge fund darling called PXRE Group (ticker: PXT) though? The stock is off some 70% after S&P cut the company's debt rating to 'junk' on greater-than-expected hurricane claims. Consequently, some of the biggest names in the hedge fund industry (who had bought loads and loads of the stock during the fourth quarter of 2005), took a big bath today -- we are talking about [among others] DE Shaw, Och-Ziff, Perry Capital, SAB Capital and the bluest-bloods of them all -- Eton Park Capital, founded by ex-Goldman prop traders. The lesson is that bad stuff can happen even to the best investors out there... especially in a crowded long name such as PXT (which might have looked like a "value buy" only 3 weeks ago). Unless of course you are Chuck Norris. :-)

Pour Some Suuugggaaar On Me....

Sometimes, it does seem easy (but, I assure you, it ain't!). I did mention yesterday that I expected base metals (such as aluminum, nickel, lead, copper, etc.) and sugar to take a tumble soon as the fools who purchased at the top are getting themselves carried out, feet first, by an inexorable force called "late long liquidation". Those futures are all down 4+% today. It ain't over!

I would be interested in purchasing silver at $8.95, crude oil at $57.50, and sugar down around $14.50. And yeah -- equities, just like I had predicted, are not ready to go down yet -- there is too much stupid money around...still!

Bernanke Speaking More Plainly Than His Geriatric Mumbling Predecessor

What a relief there is someone at the Fed helm who actually doesn't sound as if he is from another planet! For now, he is sticking to the party line -- but does he have a choice? Imagine that you, an academic type, just stepped in and filled Mr. Irrational Mumbling's shoes -- would you want to scare yourself, let alone the market by uttering anything dramatically different from what was being said before you came on board? I didn't think so...

Anyway, nothing really is happening in the market, so I guess that's 1:0 in favor of Bernanke and the Fed. Even the FX and fixed income markets moved up and down and ended up pretty much unchanged. Pay attention to the base metals and a few of the soft commodities such as sugar -- I smell another wave of long liquidation coming. There is never just one cockroach...

Barron's Kicking A Sick Dawg While It's Down...

I hate GOOG with a vengeance. The readers of this blog will know that I was calling for a decent correction as far back as early November. But what Barron's doing here is quite untoward, to put it mildly. They are ganging up on the name and raising old issues which I had raised myself but which all of a sudden "gained tremendous importance" -- pressure from competitors, lofty valuation, ballooning costs, blah, blah, blah! Come on! This is not sensible financial journalism, this is sensationalism! There is nothing new there and I am going to be the first to ask 'Where were you, Barron's purported GOOG bears, when the stock was soaring in the high $400s??' Now, all of a sudden they are calling for the stock to go down 50% from here. Yeah, Queen Victoria died... fyi.

Nikkei is down 2.5%. See my comments from Friday. This is a bit more "real-time" than Barron's articles, I would say.

Nikkei Poised For A Dive?

Strong fundamentals [going forward] in the Japanese economy do not necessarily translate into a continued strong Japanese stock market... In fact, it may well be the case that the Nikkei has already priced in the Japanese recovery during the past 12 months -- just take a look at its chart which resembles the chart of GOOG before its recent fall.

This week, the Nikkei posted a bearish weekly technical reversal with a close at slightly below 16,300 off the highs both earlier that week and earlier that day (Friday). If conventional technical analysis is to be believed, there is a better-than-50/50 chance of a minimum 10-12% correction toward 14,500 or so, which is where the inverted head and shoulders neckline pattern lies or, rather, lay -- before the market tried (and failed) to push through the highs at around 16,777 or so. Given the violent recent moves in the Nikkei -- a 23% volatility for the 90% puts in June'06, looks to be a cheap way to play this retracement/correction. Stay tuned for more a bit later.

Why This Market Refuses To Go Down...

...Because there are more buyers than sellers would be the smartass crack. No, it's because earnings are still good, there is just too much money around and people still refuse to believe that the U.S. economy is going to be in trouble soon. One can't argue with liquidity-driven buoyancy. Everyone witnessed that the SPX broke 1,260 the other day on pretty decent volume and threatened to take out the January lows to test an even bigger level down below at around 1,230-20. Yet the bulls simply crawled out again from the woodwork and bid up the market one more time on the back of some solid earnings/guidance out of CSCO (yesterday) and BBY (today). It's tough to be short, but if you can muster the patience you can relatively easily unearth short overvalued single-stock candidates-gems such as AAPL and GOOG, even if the momentum is initially against you. May the force be with you.

Buying Back Some GOOG Shorts...

I know I said my bid was down in the $340s, but a technical jock called in and pointed out to me that the last major breakout happened from the $350 level. So I am going to follow that advice, after today's stream of juicy downgrades, not be greedy, and buy back some of the GOOG short @ $356 -- a nice round number just above that area of congestion. What's a few % between friends when scores are at stake...

Speaking of shorts, another one of my perennial favorites -- AAPL -- seems to have broken some decent support levels under $70 here. The stock, while not in the stratosphere anymore, still doesn't look too cheap yet. So I would stay away from it for a while, and if you simply have to buy a tech darling -- you might just want to try your hands on GOOG for a $40-$50 bounce off these lows around $350.

Four Words: Bearish GOOG Technical Breakdown!

Finally, some of these longer-term GOOG longs are getting really stuffed. With the stock trading @ $365, I am going to tentatively put in a cheeky $340 bid to buy back 1/2 my short from $463. Probably not going to get there today, but there is a clear bearish pattern which is trying to establish itself, so let's give it some room to breathe!

Inflexion Point In $/Yen...

I seem to be calling inflexion points in $/yen pretty well. I was away for a few days and the first thing that I noticed when I came back was the horrible price action in the $/yen off its recent highs immediately after the NFP numbers this past Friday. $/yen rallied quickly, hit *a lot* of stops above 119 and then proceeded to completely reject that (higher) level, turn around and sell off for the next 2 days. Yes, there are some i-rate encouraging news out of Japan, but then again the FX market is notorious for going where it wants to go, rather than where people expect it to go. And all of this is even stranger given that the euro and cable continue to be quite weak against the dollar.

As far as the general equity market is concerned, the SPX continues to flirt with the possibility of a pretty disastrous technical breakdown below the 1,260 level, but so far it just manages to keep its head above the water. I am still holding on to my bullish March call... Time is my ally.

$/Yen Overshooting On The Way Up...

Why exactly is it trading at 118.50? Probably because people are still expecting higher U.S. yields (essentially the carry trade), stronger U.S. economy and stellar non-farm payroll (NFP) numbers tomorrow (Friday). These may all materialize, but if everyone is on the same side of this trade, it's difficult to justify a higher dollar this year with all its inherent structural problems. I was long the bounce, but now I am out. For choice, would be short here (118.50) again, but let's see how these NFP numbers pan out.

How Do You Like'Em Googles Now!!

The market has finally come to its senses and has indeed seen that GOOG cannot possibly maintain the earnings momentum from previous quarters. The math just didn't add up, which is why I had suggested to short the stock aggressively between $425 and $475. It was down about $80 after-market last night and now it's only down about $40 -- give or take about 10%. Still it's a start in the right direction. I will begin to get interested in buying this name somewhere around the low $300s. Until then, I am going to sit and watch the pain -- french for bread.

Fed Decision Today...

The debate seems to be whether Bernanke moves in to raise rates one more time after Al is gone (to establish his inflation-fighting credentials immediately) to 4.75% or whether the Fed is going to be done after today. In the last couple of weeks, bonds have sold off dramatically and the dollar has rallied somewhat against the major currencies, which makes me think that people are attaching a higher probability (perhaps as high as 80% judging from the futures expectations that I saw this morning!) to another rate rise in March than they did just a few days ago.

I have always been in the "more rate rises to come" camp, so I will stick to that view still, even if it's the majority-dominated stance right now. Whatever the "neutral rate" may be, it sure as hell ain't 4.50% -- just watch the price of gold for an indication of what savvy fund managers think about inflation... The Americans have done a pretty good job hiding their real inflation number -- the one that has inflated the asset prices (read house market, stock market, energy prices, etc.), not the price of a cheap pair of pants from Walmart that, yes, costs about the same as last year.

Unexpected, Counterintuitive, Unwelcome $ Rally Anyone...?

I am now out of all $ longs. I was expecting just a relatively small bounce (which we got) in the big picture scheme of things, and I didn't think it would be anything more than that. The $ however has proceeded to inflict significant technical damage on the $/euro and $/yen below 1.2175 and above 116.50 respectively. I would therefore have to say that one needs to treat these kinds of technical breakdowns with a healthy dose of respect. So let's sit it all out and wait... And then wait some more... I have a feeling that the combination of the Chinese New Year in Asia and tomorrow' Fed meeting has exacerbated the situation a bit, but one nevertheless needs to be cautious with $/euro trading below 1.21 and $/yen trading above 117.50. If my suspicions turn out to be correct, we could see 1.18 $/euro and 120 $/yen handles within a couple of weeks, as the majority of market players, it would seem, are JUST NOW positioned for $ weakness (yes, I just saw the IMM FX data!). Not a good sign to say the least!

I know the U.S. economy fundamentals don't exactly support a stronger $ at this point, but one can't argue with the market. It could be right for a lot longer than we could be solvent...

What's In A GDP Release...

So the GDP growth number comes in at 1.1%, about oh... 1.7% off the pace and the soothsayer market "gurus" are already out in force screaming their heads off that, you see, everything is just alright, the U.S. economy is humming along just fine, things couldn't be better, the economy will of course bounce back in the next quarter. What a load of crocrap! I'd much rather for someone with a half a brain to come out and say something like this "Look, guys -- the number is just crap but we choose to ignore it because we have cash to invest and can't afford to miss the boat on this rally. This is a one-off, I promise..." I already talked about the January craziness that people are prone to, and today's price action is further solidifying my view.

I therefore choose to sit by and wait on the sidelines. The market is not cheap and people are doing stupid things. Performance chasers are playing a dangerous game -- so when they get taken out, feet first, later on this year when the SPX drops down to er.... about 1,150, I will not a shed a single tear for them, I will not have a gram of sympathy for their bloated egos which will start exploding with a nice plomp like water balloons hitting the pavement from a pretty decent height... And that height as I have said all along is somewhere above 1,310 (by the end of the first quarter). It's the nature of the sport -- greed and fear, fear and greed.

Well... It Could Be Worse...

After shorting AAPL @ $86, I bought it @ $73 (trading a bit lower now), and sold out $/Y at 116 (after going long at 114) just as shorts were stopping themselves out. Better than a kick in the teeth. Fed decision coming early next week -- the consensus right now is that the Fed has at least one more rate hike left after this coming one. But things might well get dodgy soon with Bernanke stepping in Al's shoes next month. So, unless there is something immediately obvious which warrants a big position, it might be best to step back and take some risk off the table.

As I suggested yesterday, the bull party still seems to be going on, as it's January and people are not afraid to go crazy early on in the year (as there are still 11 months to make up for any mistakes). Might still be better to stand back and watch the craziness unfold though.

Getting Ready To Take Some Profits...

On my AAPL short (since $86 -- overvaluation/stupid fundamentals) trade -- will wait for $73, current price around $73.75...
On my $/yen (since 114 -- bounceback from 200 mavg/oversold) trade long -- will wait for 116.

I try to buy or sell when others are stopping themselves out. It's just the nature of the game.

Otherwise, the invisible hand in the SPX is doing its utmost to support the market here, and I can't say that I blame them. Good for them! Since we all know it's EVENTUALLY all going to end up in tears, we might as well enjoy the happy-go-lucky ride.

Food For Thought...

Investors usually look at the first five trading days of January (of each new year) as an indicator of how that year is going to turn out to be. Judging from this year's flying start (the market being up well over 3% in the first week), we should expect a bull market year. A lesser well-known fact perhaps is something called the December low indicator -- which just states that if the market crosses the Dow December low (made on December 30th, 2005 @ 10,717.50), especially in the first trading month of the following year, there is bound to be trouble ahead. The Dow crossed and closed below that level last Friday, after the expiration-exacerbated selloff, and Monday's recovery wasn't anything to write home about either. So, two conflicting views are clashing right now and it's hardly surprising that vols have picked up recently. I expect the bulls to eventually win, but only as far as the first quarter is concerned (hence my March'06 level of 1,310 in the SPX still stands). I am not sure what happens beyond that. If someone does, I tip my hat off to them.

Important Things Happening...

-- SPX overshot on the way down on expiration Friday (stopping me out on the intraday bounce trade in the process), bearish momentum increased;
-- GOOG, AAPL among other stock market's darlings took a real beating, finally vindicating my bearishness on high valuation grounds;
-- Eur/$ broke upside resistance at 1.22 and proceeded higher (where are the dollar bulls now?);
-- the VIX closed the week at 14.56 -- the highest level since late October;
-- the Nikkei looks perilously close to a major double digit % correction, if 15,100 doesn't hold;

I feel we are at a decent inflexion point which may determine what kind of a year it's going to be. For the short term however, there may be just too much money around for the market to totally collapse here. 1250 SPX support. Too close to scare away lots of 2006 longs yet.

SPX Reaching First Support Here...

I had earlier called for a "mild" retracement which is happening right now -- helped by some so-so or simply atrocious earnings during this past week, and probably also because of option expiration today. I do think however, we are reaching the intermediate level of support in the SPX at 1,271-1,267, which should provide the first opportunity for the bulls to defend their 2006 yearly gains. Below that, I am afraid there is nothing of significance until the low 1,240s... So, I reckon it would be important to see what kind of reaction we get out at these levels. As I am writing this, the SPX is trading just below 1,270, but I am still going to stick with my bullish call for the end of March, but I might need to revise it, should the market render significant technical damage here. For now, buy the dips below 1,270 with a stop loss at 1,264...

AAPL Is A Short... Revisited

A couple of days ago, I (actually it was my wife with whom I wholeheartedly agreed) called for shorting AAPL @ $86. The stock seemingly can't keep up with the market's lofty expectations... Again, great company but expensive (therefore bad) stock. Some people confuse the two. A 10% correction is nothing for this name. It is still far from being cheap on a variety of metrics and I can't see why anyone would want to plough back in it around here, just for the (momentum) hell of it. Stay short, we may see $70 soon before this "mild correction" is over.

Predicted Retracement Happening...

The retracement which I called for a few days ago is happening as we speak. INTC and YHOO severely disappointed investors with their earnings announcements and the Japanese herd mentality from overnight didn't help either. The low end of the range in the SPX would be round 1,270; so we might see some pressure still in the days ahead, especially if it continues to be tech-driven (until now, the stellar outperformer of the year). Stay tuned, at least the markets are no longer boring!!

Guidant On Cloud Nine...

Six weeks ago, I was patting myself on the back saying how $10 profit for 3 weeks on the Guidant deal isn't that bad. Well, it's $12 more since then (coming to around $80 in total), and this is higher than any price any GDT shareholder has ever gotten out of any acquiror, even before all the controversies hit the newswire. It's a stupid price and Boston Scientific is looking desperate, to say the least. GDT should hit that bid and make their shareholders happier than ever.

$/Yen Showing Signs Of Strengthening...

Three days ago, I pointed out that at 114, $/yen looked a bit short-term oversold and I called for a possible "breathing space" bounce. The market seems to be agreeing with me, given that today it touched 115 on virtually no new news. My initial (and probably 1/2 P&L monetization) target would be 115.50, where I hear a lot of big boyz (read big banking prop/macro FX desks) have their sell orders for the (potential) second stage of the $/yen carry trade liquidation. I concur. My only concern would be if Bernanke goes a bit nuts on the i-rate lever and overshoots to over 5% on the Fed funds rate. Unlikely, but still quite possible. Stay tuned -- it's going to get exciting soon!

Hmm... I Might Not Be The Only Crazy One...

It would seem that the adorable Mr. Henry Blodget must have read my note from this past Monday, because he came up with a $100 price target for GOOG to join that other lunatic-cum-analyst Philip Remek who dared to suggest that GOOG might only be worth $260!! Quick, lock'em up at once lest this blasphemy becomes a widely held belief!

AAPL Is A Short...

My wife tells me that AAPL is a short @ $86. I always listen to my wife. Therefore I must concur with her and must strongly insist that AAPL is indeed a big, big short here. Seriously, can we all agree that AAPL is pretty far from being cheap @ $86, and it's become a "fashionable" stock (just like that other belle du jour called GOOG) which people buy blindfolded because their grandma is calling and asking them about iPods. Speaking of fashion: it tends to be a real fickle thing, and hence I wouldn't put it past Samsung, for example, to soon become the new premier "digital lifestyle" brand, the posterchild of the very fashion-conscious (and super-naive) MP3 generation.

After releasing stellar preliminary sales figures and getting upgraded by a bunch of trend-following Wall Street analysts, the good news for AAPL, from a financial/investing perspective, may well be over. Sell it if you own it or short it if you don't.

Is $/Yen Poised For A Bounce?

The yen has rallied over 6% in a little over 4 weeks (not counting the slow X-mas period) to reach the key 114 level. It seems people are well-positioned by now for more $ weakness this year. However, the yield advantage of the $ cannot be ignored completely. Fed fund rates are likely to rise at least one more time to 4.50%. Technically speaking, the 113.75 level is a very good trend line support (below which we will probably see the 200-day moving average around 112 pretty quickly!). We could therefore see a short-term bounce from here, perhaps toward 116.50 or so... especially if the trade figures tomorrow surprise on the positive (less negative) side... Longer-term, I am still quite convinced that the yen will see 110 before 120 (if ever). I correctly predicted the original correction from 121. Let's see if lightning can strike twice as far as this potential short-term bounce is concerned...

SPX Severely Overbought Here On A Short-Term Basis

1290 traded yesterday -- that is a flying start for 2006, a gain of about 3.5% just in the first five trading days. My March'06 target for the SPX of 1,310 is not that far away, but I think we will head lower soon, as I reckon that gain is just a bit too much too fast in the short run. The market needs space and time to establish a new 2-3 months trading range (possibly 1,270 being on the low end of it) -- hence, the SPX needs to come off its highs here and head perhaps 15-20 points lower. If it doesn't... well then, it's a crazy bull market again!

GOOG Ripping My Face Off...

I do hate this stock with a vengeance. Being short from $424 is no fun, especially since, by this time, it's no longer a valuation game, but a competition between fools and er... greater fools. $2,000 price target? Hello, doesn't anyone remember Henry Blodget and the tech excesses of the late 90s? Apparently not, it seems.

I am pretty sure GOOG (being one of the more arrogant, secretive, and investor-UNfriendly companies!) will come back to earth at some point this year, the question is whether this fool (me) would stick it out till then. The safest way to express a short view at this point is to buy some Jan07 put spreads -- the GOOG 420-390 put spread is going to cost you around $10 (the premium spent being less than 2.1% of the current stock price of $472). Even a mild correction in the short-term would double your money, without causing too much decay pain. And, in the longer run, there is plenty of time for the stock to go back to under $400 (down 15%) at which level it was only a month ago.

Not Too Hot, Not Too Cold...

... is the mantra repeated by most investors after the non-farm payroll data came out today. The increase of 108,000 jobs was a lot less the projected 200,000, but the upward revision from the previous month more than assuaged any "cold" fears. So the market promptly took its cue from this and proceeded to rally another 1% to above 1,285, thus overcoming the psychologically important resistance level of 1,277-1,280, at which hurdle it had stalled on several previous occasions in December of 2005. What's more, today's SPX gain brings the total gain from the first 4 trading days of the 2006 year to somewhere in the vicinity of 3% -- and, you know what they say: as the first few trading days in January go, so does the whole year... Hmm.. we'll see. At least I am well on track for my next "prediction" to come true -- that the SPX reaches 1,310 some time by March of 2006. From there on, I think we will see a substantial correction. I am afraid the goldilocks scenario for the U.S. economy might prove to be too good to be true, longer-term. Prepare for the worst and let's hope for the best, as they say.

What Are The Chances Of...

... the Fed pausing in their January meeting? Hell might freeze over twice before that happens; none, zero, zilch -- some would say! But in the Fed minutes notes (released the other day) from their last meeting in December, it would seem that the FOMC members were having a real hard think about whether it may actually not be more prudent to wipe the slate clean for Bernanke, so to speak. I believe the exact wording was "the number of future Fed tightenings may not be large"... What does "not large" mean? Is it the same as "small" or perhaps even "none"?!? Is the Fed taking the mickey out of investors? I thought all these things were "economic data-dependent"... Could Greenspan be saying in his own weird, roundabout way that he thinks it's for Bernanke to decide "just how large" is "large". The market is currently attaching almost 100% probability that we shall see a rate rise this month as well; hence if one wanted to spend a small $ amount/premium to be the silly contrarian on the odd chance that Greenspan goes out with a bang-bang, surprising everyone -- the payoff could be huge. Perhaps it's time to buy some out-of-the-money March Eurodollar calls -- take a look, it may well be worth a hail-mary punt.

EuroDollar Target Reached...

1.21 eurodollar trades and proceeds to go a little higher on the day as well... I must admit it all came to pass a little sooner than I thought, but it would seem too many people were still harboring dreamy hopes of a strong dollar into 2006... Yes, I can feel their pain... not! Overall, my bearish call on the $ was vindicated to the tune of a 3.25% gain, which, in the world of FX, is quite a move for the world's two major currencies within the span of just eight weeks. Coupled with the fact that my pre-X-mas target of 1,275 in the SPX was also reached on time, I feel confident that my other "predictions" for 2006 would also materialize before long, especially the one about Brazil winning the World Cup. Sorry England fans -- one boorish yob Rooney doesn't a winning team make.

The Dollar Bulls Seem To Have All Abandoned Ship...

First trading day of the new 2006 calendar year and already the first trade the FX masters of the universe are doing is dumping the old greenback against almost anything that moves. How quickly times change... Six weeks ago, one couldn't pick up a decent newspaper without stumbling upon an article about just how great the U.S. currency looked. I am no FX guru, but I was right about being sceptical about the overly bullish dollar sentiment. My 1.21 euro/$ target by February of 2006 is not that far away.

The Fed minutes today indicated that the tightening cycle is drawing to an end. Consequently, the market tested the 1,245 SPX support level briefly and then proceeded to rally on the expectation that the Fed will finally loosen the reins so to speak. Gold investors seem to be betting that we are still far below "neutral rate" though -- or why else would gold be hitting new highs if there was indeed "no inflation" and the other asset classes offered "good value". Something is amiss here and I've been trying to put my finger on it for a long time without much success I am afraid. I do however feel that the U.S. economy is setting itself up for a massive disappointment this year. The brief yield curve inversion (10s yield dipping below 2s yield in late December'05) is but just a harbinger of the troubles ahead. Watch the house market -- the mother of all bubbles, even bigger than the one which brought the tech market to its knees in the late 90s. This is what ultimately may bring down the "invincible" U.S. consumer -- the engine behind the growth in the U.S. economy.

GM Stands For General Mismanagement...

What a load of doodoo! Kerkorian sells 12 million shares of GM @ around $20 for "tax purposes"?!? Sounds like a $575mm stop-loss to me! I had already questioned the logic and the timing of the original trade. I had also asked the question whether GM is/was a buy @ $21.25. Clearly I am not so sure anymore as I am also getting stuffed a bit here at these levels, but evidently not as much as Kirky boy -- this might well be one of his worst trades ever.

On this "happy" note, I am off for my X-mas break today. I wish everyone a peaceful and restful holiday period. Will be back in the blogging saddle in early January.

Closing 1/3 of MWD-GS Spread After Excellent MWD Earnings.

Almost 17% of MWD outperformance in 6 weeks. Bought MWD @ $52, selling some @ $58.25 (stock is up in excess of 2.5% today); shorted GS @ $131, covering some @ $124.75. John Mack finally delivers!

Yeaaah, I Am On Strike As Well... Easy, Ain't It?

Holding 7 million people hostage in NYC just before X-mas is no good way to ingratiate yourself to the general public and thus win popular support for whatever "issues" may be at stake. In the long run, the transit workers will lose. It's just the name of the game.

The SPX has retreated somewhat after reaching my pre-X-mas target of 1,275 the other day. Aggressive bulls should look to plough back into the market around 1,249-1,245 which was the upper end of the previous 3% range within which the market was well contained for a long, long time. I still expect the SPX to eventually make its way higher toward the 1,300-1,310 level by March of 2006.

MWD Overtakes GS In Terms Of Market Capitalization

The MWD-GS spread has moved 12.5% in the money with MWD now overtaking GS in terms of equity market capitalization. I expect the trend to continue in the new year, as MWD has a lot of ground to make up on its peers, since its stock has been stagnant (when compared to stalwarts such as Lehman, Bear and Goldman) for the past 30 months or so.

The bloggers are up in arms outraged at the company management behavior of this stock: IDT. Note to PR people: if your company is in trouble, ticking off investors and/or running and hiding to buy time probably isn't very smart. Having said that, it may all be just a nasty case of genuine miscommunication -- so if possible, do your own homework before jumping into profound conclusions.

Gold Bounces From $493.30...

It seems like there was some sort of liquidation going on early this morning (during Japanese market hours), as gold spot touched $493.30 but then proceeded to bounce hard to well above $500... That was the first meaningful level from which I expected a strong bullish reaction. So far, it looks like the gold bugs are showing the necessary resolve to defend that obvious support level.

All That Glitters Ain't Gold...Revisited

A friend of mine was quoting a Japanese proverb to me the other day, which translates to something like this: Jaywalking is "safe" as long as all of us do it together, at the same time. That's a bit like what's happening in the gold market. This is also one of the reasons why, a few days ago, I called for shorting gold as it was spiking vertically higher on some pretty obvious panicky-type of overseas buying. Herd mentality rules, but even more so in December when routine moves are exacerbated by people ganging up obsessively on the bid or offer side of a particular asset class. Gold spot should bounce from somewhere between the $485 and $495 level, but the exact price would very much depend on where the herd takes it in the last 2 weeks of December. Savvy traders usually avoid trading during this time, unless of course they have a death wish.

... And The Worthy Winner Is... $/yen Bear By A Technical K.O.

$116.75 trades. Wow. Wow!! Biggest absolute move in almost 5 years, a 3-standard deviation drop! A lot of bullish macro funds are hurting today. The ultimate contrarian trade makes it big today -- I am taking partial credit for being 80% lucky with the timing!

Where Are The "Consensus" Dollar Bulls NOW?

The dollar bulls are really taking it on the chin again today. After the Japanese Tankan survey of business confidence, the yen rallied the most in 4 months against the dollar -- to 118.50 from about 120 late yesterday. I did write a few days ago (with the yen at 121) that the yen looks like the most undervalued of all major currencies against the dollar. A nice correction toward the 115 level may be under way, since the trend line at 119.50 was broken earlier today.

On a slightly different note, with the euro trading at 1.205, it is within a shout of my target of 121 by February 2006. I am surprised it got here as quickly as it did, but I guess it's December and even small price movements can be exacerbated by thinnish trading volumes (due to a lot of people taking off early from work, ahead of the X-mas holidays).

The Fed did its little semantic exercise yesterday, basically saying that "some further measured policy firming is likely". I have no idea why anyone would ever consider that statement to be "dovish" or "hawkish" for that matter -- my take on the whole thing is that the Fed has absolutely no clue what is going to be needed, hence they hedged their future actions both ways, if you will. Good thing they are not traders, because they probably won't make the cut with their willy-nillying. Gun to my head, my bet remains that the Fed benchmark lending rate is going to 4.75%, no matter what.

To Accommodate Or Not To Accommodate...

That is the question in front of Greenspan, as he looks to cement his Fed chairmanship legacy (to the extent that there even is one, since we may be seeing the unintended economic consequences of his policies for years to come!). Part of the reason why long-term yields have remained low may be because Greenspan has been remarkably transparent (and consistently so!) with his "measured" language rhetoric which has created an incredible price stability and has thus aided the U.S. economic expansion since June of 2004. Does he give the market false hope that the rate rises are nearing an end? Or does he stick with a tried and tested approach which has been so successful in the last 17 months -- why fix something if it ain't broke? I am leaning toward the latter, as I think Greenspan might want to let Ben Bernanke establish his own credibility and make his own mistakes (and yes, there will be mistakes!). To be honest, I could be way off here, as again, I am going against the generally accepted market consensus, but that tends to be the flavor of the month, as I did call for a higher euro when everyone else was extolling the virtues of the greenback -- and I lived to tell the story ;-)

The Market Always Goes Where It Can Hurt The Most People...

It's only a few hours ago that I wrote the eurodollar is poised to rally and even that already seems like old news... There is much blood on the street/carnage today for the "vociferous consensus" $ bulls -- euro at $1.1975, pound at $1.7750... One more reason why I always insist that it never pays to follow the herd (or to read the WSJ for trading ideas for that matter!!). I expect great FX volatility going into month-end, as lower volumes exacerbate even routine daily moves.

Eurodollar Poised To Rally

It has been my assertion for a while now that the $ will top out out against the major currencies during December of 2005. The price action in the eurodollar would certainly suggest that the $ will have a hard time breaking out against the euro around the 1.165 level. In fact, as things stand right now (1.1875), if the eurodollar closes above 1.19, it has a pretty decent chance of clearing, before the end of this month, the psychologically important 1.20 hurdle below which it has been trading for over 5 weeks. The Fed might come out tomorrow and say that "accommodation" is history, and some people are already betting that the end of the raising-rates cycle is just around the corner. I happen to think this may not be the primary factor driving the $'s FX valuation, but at least it may divert people's attention back to the "small" matter of the fundamental structural problem with financing the U.S. current account deficit. I am sticking with my 1.21 target for the eurodollar by February of 2006.

Time To Buy The Yen?

There is an incredible consensus in the market that the Japanese yen is "supposed" to weaken further. I am not so sure. Interest rates are going to go higher there... eventually -- the Japanese government said so themselves recently. In my opinion, at 121 against the greenback, the yen has already fully reflected i-rate expectations in both countries. Part of the reason for the yen's recent pronounced weakness may be that people buying Japanese assets (such as equities) may be hedging out there yen exposure by selling the actual currency -- indeed the correlation between the Nikkei and the yen during the last 2 months has been nothing short of extraordinary. Still, something is bound to happen -- either the Nikkei rally isn't for real, or the yen is going to strengthen. The Nikkei rally to me looks like it's not "just a bounce" (there are some very good reasons to believe that the Japanese economy is doing very well) -- local institutions may just now be stepping in to follow foreigners (mainly hedge funds) in their buying of the Japanese equity market. Hence, my bet is on the yen strengthening significantly -- I have a lot of conviction that we are going to see the yen rally back to 115-112 within the next 5 to 6 months to reflect a fairer fundamental relationship between interest rate expectations in the U.S. and Japan.

Not All That Glitters Is Gold...

... including..er...gold itself. The front month contract is already trading at $521.20, a good 14% higher from just a month ago... It's hard to say why investors are buying it. As I have already suggested previously, I don't believe in the "diversification into alternative assets" principle. Having said that, one can't argue with momentum. Gold at these levels has reached a pretty good long-term resistance however, hence I would be tempted to recommend for long investors/traders to look to exit their positions around here. Those who have a death wish might even dare to put on some speculative shorts here with some tight stop losses around $535. I have a feeling we are going to see a good retracement in this shiny metal commodity over the next 3 months...

SPX First Target Almost Reached...

As I write this, the SPX is trading at 1,272.50 -- within a couple of points of my 1,275 (by X-mas) target. I think that level will be easily reached now, especially since the SPX 1275 Dec05 call (expiring next Friday) has a pretty good open interest. I expect the SPX to stall around that strike in the absence of any catalysts. 1,280 in the SPX may well be a level where one would look to put on a short-term pullback/retracement trade/short. More on that to come perhaps later, depending on how the market acts between now and expiration Friday next week.

Guidant Revisited...

I really thought the GDT saga was finished for good when JNJ came back with their revised bid, after initially threatening to walk away from the deal altogether (because of GDT product recalls). At the time, everyone thought JNJ got themselves a sweet deal (through some tough negotiating!) at around around $63 ($13 lower than their original bid). Boston Scientific however today announced a 14% higher bid, which throws the whole deal up in the air. In either case, GDT shareholders who bought the stock @ $55.50 (as I suggested) on Nov. 7th are currently sitting on a solid 20% profit with the potential for a bit more, should the M&A process drag on for a while longer. I would be curious to see what JNJ's reaction to all of this is going to be. My bet would be that they may need to raise their offer as well -- they can't afford to be left behind in the dust, when it comes to the therapeutic medical devices business.

Yep, This Might Just Be A Good Trade After All...

Two days ago I wrote that the BKX (the banking index) might be topping out around these levels ($105-$106). I would like today to put some more substance to this trade by actually going long the S5PROP (S&P500 property and casualty insurers) @ $287.25 vs. shorting the BKX @ $104.65, as a pair trade. Not saying that S5PROP won't go down, just saying that BKX would go down further if that was the case. Why? First, I think that, following this year's record -number-of-hurricanes season, the insurers are entering what I deem to be a cyclical bull market in terms of premium power, whereas the banks might just be coming out of one, if my "not-so-rosy" scenario for the U.S. economy materializes in the second half of 2006.

Second, insurers tend to do better in a rising interest rate environment -- so, if Helicopter Ben goes nuts with the i-rate lever (and the current strength in the U.S. economy seems to indicate that the Fed indeed won't stop raising rates until we see the 4.75% level at least), that would also be better for the insurers than the banks. Third, if the yield curve inverts (as I discussed yesterday), the banks would then be even more hard-pressed to reproduce their stellar performances and record profits of this past year. And yes, I come from the old school of thought which advocates that banks are way too accustomed to making "the easy money". Sorry to rain on someone's parade, but the easy money is already made, mates! Going forward, making money is going to require much smarter risk-taking (with possibly lower leverage or else we would be really asking for trouble!). Except for Goldman (which, let's face it, is actually a hedge fund with an M&A advisory department), I am struggling to name an investment bank which really knows what they are doing in that department. The bottom line is the end result of all this has to be higher volatility in the market, which isn't so good for the banking brethren either.

Maybe this trade is way too obvious and thus, by definition, will fail. Maybe... I have a feeling though that we won't be seeing VIX at 11 for too long. Buy 18-month SPX vol. The storm is coming.

Busy Day For The Market, Lazy Day For ME...

The market woke up today and decided that the U.S. has a strong economy with (apparently) low inflation and solid, ever-growing profits. I disagree with at least 2 out of those 3 points, but who am I to argue with pure year-end "holiday rally" momentum. All kinds of sectors rallied today -- energy, banks, tech, even gold and oil. My SPX targets remain the same as before, the index having rallied from just above the solid area of support (1,245-1,235), even if I thought the market would take a bit more time to negotiate its overbought condition. Nope, no chance -- I guess the bulls are just being..er.. bullish in a seasonably bullish period. No surprise there.

Given that it was my birthday today, I decided to dedicate a lot more time than normal to reading the serious papers (of which the WSJ is not one of them). There was an interesting article in the FT today on what a potentially inverted yield curve could mean for the equity market (the yield curve is pretty darn close to being inverted and there is a good chance that it will invert by the time Mr. Bernanke shows up for his first day at The Job). I am not smart enough to figure out whether a recession is looming or not, but what I, as a professional derivatives trader, would wholeheartedly agree with is that flat or inverted yield curves are usually followed by periods of high volatility in the equity markets. This may be because the angst/disagreement/confusion (arising from the different investors' yield curve views) is being expressed in their nervous trading. Add to that already volatile mix, the fact that we have a Fed chairman leadership change (with all the unintended "Greenspan shoe-filling/legacy" consequences that this entails), and the fact that 2006 is actually a Football World Cup year (anyone care to remember the "fun" summers of 1998 and 2002?), and we might be in for some very volatile and gut-wrenching summer of 2006. I don't know about you, but I am buying 18-month variance swaps here, especially if vols get hammered again just before X-mas. I am fixing my roof while it's shining -- it may very well be the last sunshine we see in quite a while...

Is The BKX Topping Out?

The BKX (the Bank Index) is showing some signs of topping out at the 105-106 level. This may have significant ramifications, as the BKX -- having rallied 14% from its October lows -- has provided much of the fuel behind the SPX's 7% rally over the last 6 weeks. A few days ago, I wrote that I expected the market to re-test the 1,245 area again (before we can proceed higher) -- the profit-taking in the BKX might just make that happen quicker than I thought.

I wouldn't worry too much about profit-taking at this point though. I think the market may be quite safe until Helicopter Ben takes over the Fed's chairmanship at the end of 1Q 2006. Considering that retailers are cutting prices like there is no tomorrow in order to spur on consumer spending, and energy prices seem to have stabilized in recent months (down nearly 20% from the Katrina highs), I think the U.S. economy will just continue to hum along fine for now (as today's GDP report confirmed). Darker clouds await us in the latter stages of 2006 though, as a combination of housing market softening, job growth slowdown and the return of core inflation might be too big of a stumbling block for the U.S. to overcome without some unpleasant consequences. Until then, buy equities on dips and take profits on rallies toward the 1,300 area in the SPX.

Did Someone Suddenly Wake Up Today And Decide That GOOG Is Expensive?

I surely think so -- currently trading down $18 at around $405. I have insisted for some time now that, while this truly may be a great company, its stock has gotten quite a bit ahead of itself. It was trading a bit over $430 the other day (after I had called, for like the 3rd time in a week, for people to lighten up/short it @ $424), and I was thinking to myself "Am I the only fool who reckons this stock is overpriced here?" Apparently not anymore. Which does not of course mean that those of us who think that GOOG is overpriced are suddenly not fools. For all we know, we might wake up tomorrow morning and see the stock trade with the 5-handle in front of it. But hey, it's called a market, and that's why it serves healthy doses of humble pie to anyone and everyone who thinks they know it all.

Still, as Warren Buffett once said, it's pretty dangerous for a company to claim 15% year-on-year growth for a long time -- unless the economy itself is growing at 15% (which it ain't), that bold statement eventually catches up with you (and, I would add, makes...er... ketchup out of you -- forgive me, please, the cheesy pun). So, a couple of downgrades and a few insider sales later, it would seem that GOOG is destined to trade under $400 before long -- which, by the way, still doesn't make it "cheap". If it falls to under $300 any time soon, given its current financial metrics, call me -- then we are talking!

On a side note, my MWD-GS spread continues to do well (11.5% in the money so far after a little more than 3 weeks since I suggested it), and maybe after another 4-5% of MWD outperformance, I would be tempted to trim that position by a 1/3rd or so, and then leave the rest in peace for the 2006 calendar year. MWD has some catching up to do -- "The Mack is Back and Is Even More Wack", say some insiders.

Expected/Normal Retracement Happening

Turkey-eating time is unfortunately (if you hate the turkeys species, i.e.) over... The holiday euphoria has perhaps given a bit of way to profit-taking, but this sort of normal retracement/reaction was to be expected, as I mentioned just before Thanksgiving. Whenever the market takes out (quite easily I must say!) a significant overhead resistance level such as 1,245 (which, until November, was actually the yearly high for the SPX index), we shouldn't be too surprised to see a re-test of that level at some point over the next few trading days. That action would only serve to confirm the bulls' resolve to hang on to their hard-earned gains. Hence, I remain bullish over the next few months as the SPX establishes a nice base in the 1,245-1,235 area for what may be its final bull-market extension (toward the low 1,300s) higher.

What is of great concern however, longer-term, is that the U.S. housing market gives off some serious signs of overextension. Unsold homes reached an 18-month high today, and judging from housing affordability data -- the ratio of the median U.S. home price to the medium disposable income (apparently hitting a cyclical high), -- there is no way but down for house prices. I am not saying that the market is going to crash or anything, but some softness (5-10% down) is to be expected next year. This is probably going to be enough to shave off a decent percentage of home mortgage refinancings (which have been a signficant source of U.S. consumer spending power), and thus contribute to the slowing of U.S. consumer spending and confidence, going forward. Mind you, this is not the "worst" case scenario -- we have already seen similar circumstances develop in the U.K. and Australia. What is more troubling though is the apparent blissful ignorance of the average U.S. consumer as to what the consequences of all this may turn out to be. The level of average consumer indebtedness is only sustained by the relatively strong job market. If that gives way, and it may well do, then all hell might break loose. Merck and GM, which have been eliminating jobs left and right, may well be precursors of what lies in wait. The situation may well be more serious than investors think -- the ongoing structural economic shift in the U.S. -- from a manufacturing to a service economy -- is going to leave the average U.S. consumer standing on very thin ice, when it comes to affordability of basic things. Retailers may slash prices all they want (and they have!), but I am detecting a false sense of trust when it comes to the way companies view the U.S. consumer. The latter has indeed been remarkably resilient so far, but then again, the house market and job growth have been quite perky as well so far. This is hardly going to be the case forever. Tread carefully, caution is needed.

Aaarrgh... Good Point!

I goofed up a little yesterday -- Brazil did win the FIFA World Cup once before in Europe: in 1958 in fact, in Sweden, beating... er... Sweden 5:2 in the final. A big 'thank you' to the anonymous football history buff who kindly pointed that out to me. My apologies, I should have known better -- that World Cup also announced the majestic arrival at the worldwide stage of a certain 17-year old football prodigy by the fascinating name of Edson Arantes do Nascimento, a.k.a. Pele. It seems his second coming is playing for Barca today and is called R o n a l d i n h o, a.k.a. The Ever-Smiling-Toothy-Rabbit-Football-Genius Boy.

Not much to report on the market side today, except that if you're trading this week, I hope to God you didn't try to short a dead(ly buoyant) market, especially if this guy is right (which, given what I have been saying over the past month, I think he is!).

If you are still looking to sell anything, you can definitely sell GOOG @ $424 -- trust me, it's super expensive!! I have been calling for people to lighten up on that internet monster since it hit $380, but I guess what's saving my blushes now is my (other/pair) trade on getting long YHOO instead @ $38 (that one, thankfully, is trading at $43.40 right now, so is still technically outperforming GOOG by a couple of %). Still, anyone who thinks that GOOG is a bargain at $424 on its current financial metrics, should have their 'ead examined. I don't care if Fidelity has gone bonkers again, and are buying another 3% of the stock here, it's just the wrong price! Granted GOOG is a great company, but it is no longer a great stock at these stratospheric levels.

Last but not least, Happy Thanksgiving everyone -- eat safely, maybe even consider pardoning a turkey if you ain't that hungry!! Will be back in the blogging saddle on Monday.

Thanksgiving Means The Bulls Should Be Thanking Their Lucky Stars That The Bears Have Gone Hibernating

My bullish stance on equities is slowly but surely being vindicated. It seems the bears have burrowed in somewhere to hibernate (until March 2006, to be consistent with what I wrote yesterday), while the bulls are gently taking this market higher. My 'better than 50/50 chance posting' elicited quite a few pleasant private commentaries about my giving too much of a chance to Brazil winning the World Cup, but almost no one is disagreeing with my SPX directional comments. That worries the contrarian in me. I'd much prefer it if people were giving me stick for my market direction opinion than for my football stance. So, for all of you European and English football fanatics out there, you heard it here first: yes, Brazil will indeed become the first South-American football team to win the World Cup in Europe, despite what all those useless statistics say. One can argue with history, but one can't argue with pure, unadulterated, raw talent: Robinho+Ronaldinho+Ronaldo+Kaka+Adriano = 2006 World Cup Victory. You can let it go now.

Two weeks ago, I wrote about herd behavior in the oil and euro/$ markets. Just like I said that one shouldn't be selling oil ONLY because of the "mild weather", now one shouldn't be buying it either ONLY because of the (forthcoming in the NorthEastern United States) "cold weather". Please get a grip and find yourself a *non-weather* reason why you like or dislike oil and stick with it. No significant amount of money can ever be made following the herd, especially when that herd is making the most noise -- for example, as it seems to be the case with the very clamorous (and sometimes glamorous) bullish/long $ herd. The truth of the matter is that, while all that noise 'about how the $ is just going to kick every major currency's butt out there' has been going on -- the euro has either been stable or actually rallied slightly in the last two weeks, since I started counting the daily bullish $ headlines in the WSJ (which every FX honcho and his brother seems to be reading and quoting these days). If I were a $ bull, I'd be making lots of noise as well -- and taking profits when no one's looking, and that's exactly what seems to be happening by the looks of it.

I would expect a small retracement in the SPX before we can resume our course higher, given that the market has gone from overbought to super-overbought territory (1,261 was the actual SPX index close today) during this pagan-holiday week. If no retracement to, say, the 1238-1235 area happens soon, then I think it might be safe to holler "ladies and gentlemen, please buckle up your seatbelts and enjoy the ride!", and I might just have to update that 'better than 50/50 chance' posting with something like the 80/20 rule, which might prove to be a more aggressive but fairer reflection of reality...