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.