t Shadow Capitalism
December 7 budget implicitly translates to a failure of the
MARKET COMMENTARY BY NAUFAL SANAULLAH
Tuesday, November 23, 2010
DPRK back at it again while Cowen (and by extension, entire
Irish bank bailout) faces no-confidence vote
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
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.
OPEN TRADES
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%
CLOSED TRADES
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
 NEW TRADES

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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