Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Case-Shiller figures confirm US housing double dip while UK

naufalsanaullah@gmail.com
www.shadowcapitalism.com
GDP misses big; does the recent beta underperformance
portend near-term UST- and JPY-bullish risk aversion?
The Case-Shiller Composite 20 index posted another decline, as of data released today, but
November’s -0.54% MoM decline was less than the -0.80% expected. Still, the double dip in US
housing definitely seems confirmed and should continue to be a drag on US economic growth.
Meanwhile, Q4 UK GDP misses by a full 100bps, coming in at -0.5% QoQ vs expectations of a 0.5%
increase, sending cable plunging over two big figs overnight.

Despite the US consumer confidence beat this morning, equity markets spent most of the day in
negative territory, until a late-day surge sent stocks back into green for the day. S&P 1300
continues to be defended by the bears, and the 1300/21d resistance/support zone I’ve been
mentioning is increasingly approaching a resolution.

An important point I’ve been mentioning lately is that the beta is underperforming, with the
Russell trailing the S&P and everything trailing the Dow. Beta underperformance tends to mark
turns often due to reversals in cyclically-sensitive securities tending to be leading indicators
(indeed the breakout in IWM/SPY in late September led to me catching the subsequent rally early

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and from a great risk/reward standpoint), especially when leading on the way up, as the Russell did
in late summer 2010. Below is the Russell 2000 priced in S&P 500, via IWM & SPY ETFs.

Another implication (particularly in the Dow’s outperformance vs the S&P) is the ratios’
correlations to Treasury yields, which suggests yields may selloff soon, while risk looks heavy with
overhead resistance, which implies a return to the in-tandem movement of UST’s and USD, aka
safe haven risk aversion. This is what characterized the top back in April 2010, and indeed the JPY
surged ahead of and leading the May 6 Flash Crash in risk assets across the board. As such, I am
positioned short equity, long USD & JPY, and back to long the belly of the UST curve. All of these
are bets that can turn on a dime, and are risk/reward plays just as much if not more than they are
thesis-driven trades. Below is the S&P 500/Dow Jones Industrial Average ratio (via the SPY & DIA
ETFs), with 10yr Tsy yields overlayed.

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In FX, a well-subscribed EFSF auction (with significant Asian support, again likely for the purpose of
boosting exports) failed to help EURUSD climb above the 1.37 level I’ve been watching, and I
shorted some near the highs of the day in euro, with tight stops (as well as closed my EURJPY long).
1.374-1.375 also marks the 61.8% Fibo retracement of the November-January EURUSD selloff,
potentially marking a cycle high for this rally. EURCHF has sold off in the last couple days, and a
reversal in euro may be starting, at least in the near-term. Positioning has normalized from
extremely bearish, and now that the stops have been triggered, sentiment is actually closing in on
bullish extremes, while overhead resistance weighs down and internal momentum is slowing. If
not a reversal or correction, then at least a pause is likely in the picture.

Cable was unsurprisingly thrashed after the horrible GDP print for Q4, down about two big figs
from yesterday’s highs. Yesterday, I mentioned that I saw a potential head & shoulders pattern
developing in cable, with the 1.60-1.61 level marking off the right shoulder, and just hours later the
GDP figure may have confirmed my analysis. Although, as many analysts are saying, the weak GDP
print may buy some time for the BoE MPC in getting hawkish and addressing inflationary concerns,

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the larger underlying concern has to be stagflation risk. I consider stagflation as a developing risk
for developed markets, and if oil breaks $100/bbl in 2011 as I expect, then stagflation will
definitely go back to being a household word(/Twitter trending topic.)

USDJPY continues selling off, which should put more pressure on US yields, and I will be very
concerned for risk assets if USDJPY breaks back down to 80 or below. I am bearish structurally on
JGBs as well as the JPY, and have been in the bottom-calling camp in USDJPY (although I am
currently short), but I am not counting out a further selloff if risk aversion takes hold. With SHIBOR
as high as it is, S&P 1300 hanging overhead, and riots spreading to Egypt, both the conditions and
catalysts are definitely there. If JPY does surge, then I worry that another liquidity event could
occur as a downside risk in equity risk (though I don’t think an all-out Flash Crash 2.0 will result).
The low liquidity conditions are still intact and all it takes is a surge in JPY to get vol expanding
across the board.

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Yesterday’s solar outperformance gave way to a rout in alt-energy names today, setting off a
scramble to sell and making me realize some rough intraday single equity losses. Although the
losses were limited on a closing basis due to unrealized gains being wiped out before negative
territory being hit and despite the fact that my portfolio was overall up on the day,
trades/situations like these are the essential learning tools that show the market should, at the
end of the day, be first considered in terms of risk/reward and second in terms of thesis-related
perspectives.

January 26, 2011 |5

 Trades
OPEN
Long FWLT | 28.30 | stop 37.85 | +27.17%
Long IO | 7.03 | stop 6.64 | +27.31%
Long /ZW | 690.00 | stop 675.30 | +22.53%
Long /ZC | 550.00 | stop 541.90 | +17.18%
Short AUD/CAD | 1.0165 | stop 1.0260 | +220 pips
Short SCCO | 48.55 | stop 51.10 | +10.30%
Long ZSL | 10.40 | stop 9.55 | +21.35%
Short SLW | 34.20 | stop 35.75 | +14.50%
Short ANN | 23.05 | stop 24.80 | +6.68%
Long /CT | 150.00 | stop 138.50 | +8.03%
Long OIH | 140.65 | stop 135.00 | +2.13%
Short GMCR | 35.15 | stop 36.50 | +1.00%
Long CCME | 17.55 | stop 16.70 | +8.26%
Long MXIM | 25.02 | stop 24.45 | +5.60%
Short ACOR | 28.90 | stop 30.60 | +20.70%
Long ERJ | 30.10 | stop 28.90 | +6.63%
Long TDY | 45.05 | stop 44.85 | +4.02%
Short ECH | 73.40 | stop 76.10 | +0.11%
Long TITN | 21.30 | stop 20.45 | +14.04%
Short AUD/NOK | 5.885 | stop 5.915 | +135 pips
Short CREE | 65.45 | stop 66.60 | +20.75%
Long WBS | 21.05 | stop 20.05 | +10.78%
Long EPL | 16.10 | stop 15.30 | +1.99%
Short V | 71.00 | stop 73.50 | -0.82%
Short GME | 20.45 | stop 21.05 | -2.98%
Long HANS | 54.05 | stop 52.15 | +2.31%
Short SPY | 129.30 | stop 131.00 | +0.10%
Short XRT | 47.00 | stop 47.75 | +0.53%
Short FAS | 31.40 | stop 32.50 | +3.94%
Short AIG | 53.15 | stop 56.85 | +22.18%
Long /ZR | 14.64 | stop 14.20 | +2.39%
Short AAPL | 348.15 | stop 360.00 | +1.94%
Short AUD/JPY | 82.40 | stop 82.95 | +55 pips
Short NZD/JPY | 63.52 | stop 64.15 | +55 pips
Short USD/JPY | 82.55 | stop 83.55 | +55 pips
Long MMI | 34.30 | stop 32.85 | +0.47%
Short FCX | 118.55 | stop 122.65 | +10.22%
Long EUR/AUD | 1.3520 | stop 1.3380 | +200 pips
Short ANR | 59.30 | stop 62.70 | +5.60%
Short WLT | 128.60 | stop 130.00 | +5.57%
Long CNP | 15.85 | stop 15.60 | +1.89%
Short FRO | 26.70 | stop 27.55 | +5.73%
Long GGAL | 16.24 | stop 15.45 | -2.44%
Short IPI | 37.03 | stop 38.15 | +4.48%
Long CHF/HUF | 210.00 | stop 207.50 | +40 pips
Short MR | 26.20 | stop 27.40 | +0.04%
Long NE | 37.65 | stop 36.50 | -1.55%
Short AUD/USD | 0.9950 | stop 1.0050 | -20 pips
Long NOC | 69.25 | stop 65.95 | +0.38%
Long RELL | 12.80 | stop 12.35 | +2.00%
Short GBP/USD | 1.5990 | stop 1.6155 | +190 pips
Long MCP | 44.28 | stop 39.95 | +5.89%
Long REE | 12.50 | stop 11.55 | -0.64%
Long BORN | 13.64 | 12.80 | +1.91%
Short AUD/SGD | 1.2755 | stop 1.2880 | +5 pips
Long CAB | 23.40 | stop 22.75 | +1.58%
Long TSLA | 23.95 | stop 22.05 | +3.05%
Short GBP/CAD | 1.5890 | stop 1.6005 | +130 pips
Short RAX | 31.30 | stop 32.95 | +1.15%
Short RVBD | 35.05 | stop 36.55 | +7.59%
CLOSED
Long SOLF | 9.56 | sell 9.45 | -1.15%
Long JKS | 30.05 | sell 30.03 | -0.06%
Long TSL | 28.87 | sell 28.90 | +0.01%
Long FSLR | 154.35 | sell 153.05 | -0.84%
Long NOG | 22.20 | sell 24.40 | +9.91%
Long SNDK | 42.95 | sell 51.60 | +18.00%
Long /CL | 85.00 | sell 87.57 | +3.02%
Long /ZS | 1418.85 | cover 1381.75 | -2.61%
Long EUR/JPY | 109.20 | sell 112.45 | +325 pips
Short X | 56.80 | cover 55.47 | +2.34%
Short /ZB | 120’30 | cover 120’15 | +0’15
Long VXX | 31.50 | sell 31.63 | +0.41%
Short VZ | 34.55 | cover 35.50 | -2.75%
NEW
Short EUR/CHF | 1.2890 | stop 1.3095
Short EUR/USD | 1.3695 | stop 1.3795
Long TJX | 48.05 | stop 47.10
Short ERTS | 15.30 | stop 15.80
Long /ZN | 120’11 | stop 119’14
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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
January 26, 2011 |6
professional and do due diligence before engaging in any purchase or sale of
securities.

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