Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Monday POMO weighs on USD, but European & Chinese
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concerns remain to be addressed
The week started off with a $7.8b POMO by the NY Fed, providing a breather for the USD’s recent
rally. Risk remained muted, with the S&P closing down marginally, but with some intraday
strength. The Trans-Alaskan pipeline leak, causing a shutdown of 95% of Prudhoe Bay production,
stole commodity market headlines, with all eyes on the implications on BP stock and crude oil
prices. But Eurozone issues remain at the forefront, especially with Portuguese and Spanish bond
auctions later this week, the Bank of Portugal still open to more financing, and the ECB still
propping up Portuguese bonds. Although Japan’s FinMin Yoshihiko Noda pledged support in
forthcoming EU debt auctions, the consequent rally was brief and the implications of the pledge do
little to change the EU’s outlook. Across the East Sea in China, new property taxes (on “high-end
residential real estate in Chongqing,” as per GS) and a trade surplus plunge (despite a new record
in gross trade) weighed down on Shanghai trade.

The S&P closed down 0.14% today, as it bounces off its 21d and remains well within its channel. I
remain long US equity at this point and am bullish on their outlook, but with USD looking strong
and macro risks set to resurface as liquidity reenters the market, I would not be surprised to see a
correction soon in stocks. The 21d should provide a solid sell signal if that is indeed the case, with
volume confirming.

January 10, 2011 |1

EURUSD bounced briefly on news of Japanese support, but gains have been pared and the cross
remains below the important 1.30 level. Significant support in the 1.29 handle should provide a lot
of context going forward: a break below suggests a possible retest of summer lows, while a bid
could provide short-term respite. Technicals remain very weak for this cross, and I think 1.25-1.26
could be in the cards by this time next month. The fundamental story is equally negative, as
sterilized ECB liquidity is the marginal bid in periphery bonds, while the underlying weakness
remains yet to be addressed. This week’s Spanish & Portuguese debt auctions (on Wednesday &
Thursday) should provide some direction in the near-term, but I am bearish, short, and holding.
The weakness in euro also extends to other crosses, particularly EURCHF, which is seeing a 300 pip
consolidation that I expect will resolve to the downside to new 52wk lows.

January 10, 2011 |2

After bouncing off the 50% Fibo retracement from summer 2010 lows, the Dow Jones Shanghai
Index sold back down almost 2% today, weighed down by new property taxes and bearish trade
data. A retest of its 200d looks to be in order soon, and price action around there will lend
significant context for Chinese names and derivative proxies. It is important to remember that
Europe is among China’s largest trade partners, and with EURXXX in free-fall (including vs CNY),
perhaps recent Chinese support for the euro is less altruistic than meets the eye. AUDUSD, an
important EM/China proxy (especially after the buy-whatever-China-imports breakout trade of
2010 in copper and similar products), is in free-fall as well (amplified by bearish trade data released
earlier), and the more-than-big-fig drop sends a foreboding technical signal, particularly with USD
strength positioned the way it is.

So just how bullish is the USD looking? Technically, it is breaking out of a very constructive
descending triangle pattern, and a breakout through early December highs should send /DX
through its 200d and back to Eurozone “crisis” levels from this past summer. US Treasuries are in a
consolidation pattern to match the USD’s, and if the resistance test bonds are currently
experiencing resolve with a failure, yields look ready for more rallying in the US, further supporting
the bullish USD case, especially against JPY, a cross in the midst of forming a large triangle pattern.

January 10, 2011 |3

Finally, precious metals are looking bearish as the USD rally continues, particularly with recent
volume data in ETFs & futures. Gold has breached its 55d and silver has broken through its 21d,
both moving averages that have provided significant support in recent months. I very much favor

January 10, 2011 |4

the long-ag, short-PMs trade, and it may be a trade I hold on to for a large portion of 2011
(particularly the short silver verses ags portion; gold may start outperforming again if sovereign
debt issues heat back up as I expect).

January 10, 2011 |5

 Trades
OPEN
Long ACAS | 6.67 | stop 7.55 | +19.64%
Short EUR/CHF | 1.3725 | stop 1.3210 | +1195 pips
Long USD/HUF | 195.45 | stop 192.70 | +205 pips
Long SGD/JPY | 63.60 | stop 62.95 | +40 pips
Long SNE | 33.70 | stop 32.30 | +7.30%
Long HIT | 47.35 | stop 44.80 | +15.42%
Long /NKD | 9768.00 | stop 9686.00 | +7.96%
Long N | 24.00 | stop 23.20 | +18.46%
Long NOG | 22.20 | stop 21.80 | +23.51%
Long AAPL | 307.50 | stop 295.35 | +11.37%
Long SNDK | 42.95 | stop 40.35 | +23.96%
Long CMCSA | 20.15 | stop 19.70 | +12.75%
Long NTAP | 57.80 | stop 55.60
Long FFIV | 141.10 | stop 136.95
Long DECK | 79.80 | stop 75.80
Long ARUN | 24.50 | stop 22.65
Short SLW | 34.20 | stop 35.75
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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.

Long REGN | 29.25 | stop 28.35 | +13.33%

Long VSAT | 40.75 | stop 39.90 | +10.58%
Long XEC | 81.00 | stop 78.15 | +13.15%
Long FWLT | 28.30 | stop 27.00 | +21.20%
Long GRA | 33.40 | stop 31.00 | +7.96%
Long CHF/HUF | 208.00 | stop 205.00 | +150 pips
Long CIE | 10.85 | stop 10.10 | +22.86%
Long /CL | 85.00 | stop 82.80 | +5.03%
Long SINA | 63.75 | stop 62.05 | +20.50%
Long IO | 7.03 | stop 6.64 | +15.08%
Long /ZW | 690.00 | stop 675.30 | +25.36%
Long /ZC | 550.00 | stop 541.90 | +10.68%
Long MEE | 49.10 | stop 47.25 | +15.27%
Long WLT | 104.50 | stop 100.05 | +26.25%
Short EUR/NOK | 8.050 | stop 8.080 | +320 pips
Long ONXX | 33.25 | stop 32.45 | +8.51%
Long MELI | 67.80 | stop 63.80 | +9.62%
Short IVN | 27.90 | stop 29.50 | +14.73%
Short EUR/USD | 1.3365 | stop 1.3445 | +415 pips
Short AUD/CAD | 1.0165 | stop 1.0260 | +395 pips
Short EUR/CAD | 1.3170 | stop 1.3290 | +855 pips
Short AUD/USD | 1.0015 | stop 1.0105 | +175 pips
Short SCCO | 48.55 | stop 51.10 | +6.28%
Long USD/JPY | 81.90 | stop 80.95 | +115 pips
Long ZSL | 10.40 | stop 9.55 | +6.44%

CLOSED

NEW

Short /GC | 29.15 | stop 31.60

Long TBT | 37.90 | stop 36.00
Long VMW | 93.80 | stop 89.90
January 10, 2011 |6