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One of the wildest trading sessions of the year today as the day started out volatile as ever on news that North Korea fired artillery shells at South Korean forces at Yeonpyeong Island. Only months after the Cheonan sinking and days after showing off 2000 new uranium enrichment centrifuges to US scientists, the DPRK is getting increasingly aggressive in restarting the Six-Party Talks, especially as a food crisis runs rampant through the nation (QE-induced abroad inflation isn’t helping) and ahead of the imminent succession of power to Jong-un. Obama is going to face tough politics going forward, especially as Sino-American relations have been declining as a result of economic policy, and “strategic patience” may be rendered an eventual failure, especially as China continues urging for resumption of talks. In the near-term, I’m in agreement with many that today’s sharp selloff in KRW and Korean equities may have been overdone, but retaliatory sentiment from the South is definitely on the rise, with Cheonan fresh in the populace’s minds, and either the US neutralizes its stance a bit by giving into demands for talks (unlikely) or the situation has the potential to escalate further, either with eventual conflict (in which the US cannot stand passively and watch) or internal political divisiveness if the Blue House doesn’t act. Either way, South Korea appears in a lose-lose, as does US foreign policy in the area. China, as always, will be the x-factor. Probably will pay to buy this dip in the Kospi and won in the near-term, but although this specific event may turn out to be less pertinent individually, the overall situation is heating up with no immediate way out apparent. At this point, DPRK couldn’t ask for a better gift than retaliation from the South. Implicit political risk will be a more permanently discounted market risk going forward. The S&P even issued a statement of possible review of the South’s credit rating if political tensions rise further. The fact that the DPRK can turn South Korea from the NJA darling hosting G20 to a sudden leper in the markets does not have a lot of precedent.
More political news out of Europe as well, as Irish PM Brian Cowen is facing a motion of no-confidence from the opposition nationalist Sinn Féin party, while Thursday’s Donegal by-election is expected to show opposition to Cowen. The Fianna Fáil-Green coalition losing support for its December 7 budget implicitly translates to a failure of the entire bank bailout package as a whole, so the rising political risks are clearly an EU-wide issue (as well as for the UK & US, due to contagion risk via Irish bank exposure). Given the general elections early next year, Cowen will likely be able to get the budget passed in among his last days as PM. It is important to remember that this is the third no-confidence vote tabled against Cowen, with the PM barely maintaining control after his most recent one this past summer, which saw a 82-77 vote in his favor. Because of the ever-deteriorating bank liquidity situation and his but-a-surety imminent ousting, it will be tough to get the political pressure to go even further and oppose the budget. Regardless, given the nature of global financial interests in this budget (due to its implicit connection with the bank bailout), the IMF/EU may ease contingencies for the bailout and come back with much more stringent conditions for the all-but-inevitable sovereign level bailout coming circa Q2-Q3 2011. Second time will be the charm as far as political capital for the EU is concerned, especially in facing the opposition government. However, this is a last-resort option in case Cowen can’t pull the strings in the forthcoming days, which I believe he will be able to do. While all of this is going on, the S&P rate cut of two notches to Ireland’s sovereign credit isn’t helping things, and sent contagion risk skyrocketing, leading to Spanish yields surging to new highs and very poor Spanish auctions of 3-6mo tenor. This may sound a bit conspiratorial, but given the timing of Merkel’s statements regarding a permanent debt crisis resolution mechanism involving future bondholder haircuts (which correlate very well with the heightening of the Irish bank liquidity crunch into crisis concerns), especially with the prevailing EURUSD rate at the time > 1.40 (contrary to export-driven Germany’s interests), this may be a bit of political strongholding, forcing a bank bailout to stem financial contagion risk and addressing sovereign concerns at a later date, with essentially limitless political capital in forcing undesirable contingencies, including corporate tax hikes, minimum wage cuts, and the like. Given recent Wall Street bank flow desk talk of EUR bids into today’s two big-fig plunge in EURUSD, there may be more to this interpretation than meets the eye. I remain bearish on the euro but don’t see a cascading selloff as a near-term risk… yet. ECB’s version of QE is coming in 2011 in my opinion, however, and whatever the permanent debt resolution mechanism is going to be will not be anything nice, especially if German growth data slows as the EURUSD surge from summer lows to 1.40 gets priced into exports. Also be watching for implications into CHF and whether SNB dares to take on the Fed by intervening.
Turning to US equity, the S&P sold off a percent and a half today on the back of the Korean concerns, Irish crisis continuation, and rising risks to Chinese liquidity as bank lending quotas are reached more than a month ahead of year-end (a topic I mentioned in a market commentary piece more than a month ago). However, the gap-down led to a pretty stagnant intraday session, and my view is that this dip in US stocks probably should be bought, as we approach 1170 and the 50d in the S&P. Below 1170 would set up a very nice buy point at 1150, regardless of if we take out recent highs. Leading stocks remain leading and outperforming, and unless and until I see some high-volume distribution and topping patterns in the market leaders, I have to maintain a bullish bias on dips like this.
EURUSD sold off heavily today, extending losses to below 1.34 on Asian concerns leading to a rush to USD as well as continued Irish issues and quickly-spreading contagion. However, it appears there may be some technical support around current levels, and 1.33 near below should provide a significant bid, at least in the near-term. Although short EURUSD remains my biggest position, I will be looking to add on rips here and am expecting a bounce in the near-term. Spain is going to be a big issue going forward, however, as its bond auction today showed considerable deterioration and its banking system, weak as it is, is increasingly going to be facing liquidity risk. However, Eurozone PMIs released earlier today were very strong, with manufacturing and services both beating estimates by considerable margins. A bullish LTRO tomorrow could be the catalyst for an overdue bounce in euro, especially considering the largely-ignored PMI data. With funding arrangements (around 500bps, as per Dutch FinMin De Jager) now taken care of, and barring a surprising abandonment of Cowen’s budget proposal, the uncertainty risk is slowly easing and risks to the euro are quickly becoming more of Q1 2011 concerns. I am going to hold my position, however, as below 3300 EURUSD should really start to accelerate to the downside, and add to it on rips, shifting which currencies it is funding as opportunities present themselves. I like EURCAD as a short in particular, and even more so now that 3700 has been taken out, especially if the QE trade reasserts itself. Oil has been coiling in recent sessions and I think it is primed for a sharp move soon, with my bias being on the upside of course, which would support CAD. If the Korean/European concerns ease up a bit in the near-term, market sentiment may shift to reacting to the Fed minutes, which at this point may be a catalyst for a resumption of the abandoned QE trade.
The short China trade has been on in size lately, and as I noted in my intraday update, short AUD is my other significant position besides short EUR. Similar to euro crosses, I’m quite bearish on the Aussie dollar in the medium term and will be adding to my short position on rips, but consider near-term strength in the cards. The 55d seems to be holding and unless and until 9650-9700 are taken out, AUDUSD shouldn’t see an acute acceleration in selling. Given near-below support in Shanghai equity indices, I think mid 9800s is likely within the next few session in AUDUSD, but you can bet I will be selling more AUD short into those levels. Copper futures are also bouncing off of their 55d, but below 3.65-3.70, the selling should really pick up and highs around 4.08 will likely mark the top in my opinion. Both AUD and copper are showing a bit of head & shoulders patterns developing, and the aforementioned support breach trigger levels are the respective necklines. AUDCAD is looking bearish as well, and below its 55d/9900, we should see some real selling pick up. I like long NZDUSD as a risk-on expression to take into this weakness, especially as 7600 support is long-term and very significant. AUDNZD should underperform from current levels. Above parity, all bets are off in regards to the AUD/copper/China/Hong Kong complex, but the thesis remains and likely will see me re-entering it in size in 2011. By the way, EURAUD is approaching September lows, contrary to my expectations in a piece from last week, and if we break down we could see some carry trades resuming across the board.
Back to crude, $80/bbl is holding stubbornly as support, likely preceding a rally from here in my opinion, and I like the idea of going long oil on dips and short metals (specifically copper and silver, not as much gold—I like gold long vs silver short in fact) on rips. We’re less than 10% off highs and setting up a very constructive pattern that targets triple digits per barrel, if my analysis is correct. And another good expression of this play via the Canadian Dollar is shorting GBPCAD (perhaps pairing with short EURGBP on rips if timeframes and positions are aligned).
The unwinding of a lot of summer QE plays due to the Korea concerns today brought a lot of context into the vulnerability of these go-to theses. DXY is now through its descending channel and its 55d on a sustained move, and although support at EURUSD 3300 may reverse recent strength in the Dollar Index, the charts signify USD bullishness here. USDSGD surging through its 55d was even bigger news to me, and the developing head & shoulders pattern targets August levels around 3500, which would be quite the reversal of sentiment since QE expectations started getting discounted after Bernanke’s Jackson Hole speech. USDINR also rallied hard today, lending more credence to the QE unwind story, and I will be watching for if this is a double top in the Nifty Fifty or the beginning of the last parabolic ramp up before a sharp correction, as Paul Tudor Jones suggests. Either way, I’m bearish the current account deficit and bubbly valuations and will be waiting for a short trigger (however, this doesn’t mean I won’t ride the wave up, if it indeed materializes—will be buying breakouts and shorting breakdowns 2x).
So what is it? EUR plunging or bouncing? AUD selling off or rallying? Well, as I’ve been saying, it’s a matter of timeframe, and my bias in the medium and long terms is bearish with high conviction. USD specs went heavily short into October, and their unwind is exacerbating the USD surge no doubt. How much further they have left to go in the near term is anybody’s guess but typically once these late-money reversals are purged, the next round of USD strength proves to be more sustained upcycle. And this is what I’m expecting on a fundamental and technical basis. The real issue isn’t going to be USD bullishness however (at least in Europe—China/Australia longs on the other hand will be terrified to see a surging USD TWI), but rather CHF strength and if this continues (which I expect, given Portugal, Spain, and Ireland & Greece part 2.0 all on the horizon), watch for a potential spread to central & eastern Europe, particularly highly levered financial/household sectors like Hungary (the CHFHUF trade may materialize in 2011).
Quick note on Tsys today—weak 5yr auction coming in at 141bps high yield and a BTC of only 2.65. This led to a bid in USDJPY on weakness, and the FX pair is showing a tight consolidation following its recent reversal upswing, leading me to add to my long.
And to end tonight’s piece, I wanted to mention that I’m going long quite a few bullish equity charts on today’s dip with twofold reasoning: (2) Lots of support for a lot of these nams in recent 13F filings from hedgies I like and track, and (2) I’m quite short risk in a lot of proxies so I’d like to get long a little bit to neutralize my exposure until we see some higher-conviction technical damage. Oh and PS—the news of Citadel and SAC both getting subpoenas in relation to the massive insider trading/expert networks bust by authorities is a gamechanger to the hedge fund industry for sure. Keep watching for developments in that regard.
Short APOL | 51.90 | stop 54.00 | +33.78%
Short /ZB | 133’24 | stop 135’15 | +5’15
Long VECO | 39.00 | stop 36.30 | +8.05%
Long YHOO | 15.65 | stop 15.35 | +3.45%
Long USD/JPY | 80.75 | stop 79.85 | +240 pips
Long ACAS | 6.67 | stop 6.25 | +8.85%
Long CAD/JPY | 79.60 | stop 78.55 | +200 pips
Short EUR/CHF | 1.3725 | stop 1.3490 | +405 pips
Short BP | 42.40 | stop 44.80 | +3.56%
Long CEO | 226.96 | stop 210.55 | -3.52%
Long USD/HUF | 195.45 | stop 192.70 | +100 pips
Short SPG | 106.45 | stop 110.10 | +8.34%
Short X | 47.30 | stop 49.25 | +1.59%
Short ACOR | 28.00 | stop 28.70 | +5.82%
Short /HG | 4.06 | stop 4.15 | +9.85%
Short /CT | 151.50 | stop 160.35 | +24.00%
Short AUD/USD | 0.9980 | stop 1.0075 | +210 pips
Long SGD/JPY | 63.60 | stop 62.95 | -15 pips
Long SNE | 33.70 | stop 32.30 | +2.22%
Long SBUX | 30.25 | stop 29.40 | +0.50%
Long HIT | 47.35 | stop 44.80 | +0.46%
Long /NKD | 9768.00 | stop 9686.00 | +2.74%
Long NZD/SGD | 1.0020 | stop 0.9930 | -20 pips
Short REV | 10.50 | stop 11.20 | +7.52%
Long EL | 72.00 | stop 69.30 | +4.92%
Long EK | 4.79 | stop 4.30 | -2.50%
Long NZD/JPY | 64.20 | stop 62.80 | -75 pips
Long AMR | 8.22 | stop 7.90 | -2.07%
Long N | 24.00 | stop 23.20 | +4.58%
Long EXXI | 25.50 | stop 23.35 | -0.47%
Long SOL | 9.50 | stop 8.40 | -0.05%
Long LVS | 49.30 | stop 43.50 | -0.49%
Long GOOG | 591.00 | stop 579.50 | -1.35%
Short MAC | 45.20 | stop 46.65 | +1.00%
Long TGA | 14.65 | stop 13.45 | +5.46%
Short ARE | 67.30 | stop 68.45 | +1.77%
Short AAPL | 321.00 | cover 308.00 | +4.05%
Short PWER | 10.58 | cover 9.15 | +13.52%
Long BRKR | 14.80 | sell 15.70 | +6.08%
Long AIG | 43.49 | sell 41.55 | -4.46%
Long MXN/JPY | 6.600 | sell 6.750 | +150 pips
Short EUR/NZD | 1.7715 | stop 1.7830
Long NOG | 22.20 | stop 21.80
Long USD/SGD | 1.3085 | stop 1.3015
Long AAPL | 307.50 | stop 395.35
Long CSTR | 63.45 | stop 58.15
Long MAT | 25.25 | stop 24.80
Short ARG | 63.50 | stop 64.90
Long DG | 32.35 | stop 31.30
Long VIA.B | 37.35 | stop 36.80
Long SNDK | 42.95 | stop 40.35
Long SSYS | 33.50 | stop 33.10
Long CMCSA | 20.15 | stop 19.70
Long REGN | 29.25 | stop 28.35
Long VSAT | 40.75 | stop 39.90
Short LMT | 68.30 | stop 69.50
Short XRX | 11.50 | stop 11.90
Long THRX | 21.65 | stop 20.55
Short MT | 32.00 | stop 33.10
Short FCX | 99.95 | stop 103.05
Short SCCO | 42.75 | stop 46.00
Short DB | 52.60 | stop 54.30
Short PIN | 23.75 | stop 25.00
Long XEC | 81.00 | stop 78.15
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DISCLAIMER: Nothing contained anywhere in this commentary, including analysis and trade ideas, constitutes or should be construed as investing or financial advice, suggestion, or recommendation. Please consult a financial professional and do due diligence before engaging in any purchase or sale of securities.