Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Mubarak steps down while Canadian trade figures blow past
naufalsanaullah@gmail.com
www.shadowcapitalism.com
estimates and US consumer confidence helps S&P rally to
new highs
Good day for risk to end the week on Friday, as Mubarak’s resignation helped alleviate fears of
geopolitical contagion in the Middle East. A small beat in the Univ of Mich consumer confidence
survey for February (75.1 vs 75.0 expected) helped propel US stocks to new highs. EM also got a
bid on Friday, as both Indian and Chinese indices posted strong reversal candles, though it remains
to be seen if it can be sustained in any way. December Canadian merchandise trade figures
showed a huge beat past expectations of a $300m deficit, printing at a $3.0b surplus. This helped
propel CAD to big gains in FX land on Friday, and leading to some breakouts in CAD pairs.

The S&P rallied another 0.60% on Friday as the DM bull trade continues to be on. I am getting a bit
less outright bullish at these levels, and given my large net-long weighting in US equities (which
grew quite a bit on Friday), I bought some protection in the form of bear ETFs, for a trade. Summer
2008 highs in the SPY ETF come in at around 2% from current levels, and I’m expecting some selling
around there. I remain constructive US equity in the intermediate term.

US yields are on the rise and this is weighing down on EURUSD and Friday was no different, with a
big fig drop in the cross. EURUSD has spent the last month or so consolidating its rally since
January lows, and for now, I am more biased to a downside resolution, with 1.35 being the big
level to watch. USD and US equity could both rally together here, as the US recovery becomes

February 14, 2011|1

more self-sustaining, and as Fed Tsy purchases enter their final stages without any further
iterations of QE in the pipeline, as of yet at least. Also, it is important to remember that Irish
elections are next month and that Portuguese yields still remain above 700bps in the 10yr tenor. I
remain short EURUSD and will be looking to add on a breakdown below the 1.35 level. I continue
to believe that Portugal will have to tap the EFSF and that Spain will be spared from needing a
bailout only due to unsterilized monetization from the ECB.

After bouncing hard off of the support trendline I have drawn in, AUDUSD is back above parity and
I’m out of the quick tech-driven short I had on. As of 1015pm EST, AUDUSD is up another 60 pips
above parity and not looking too bearish at all. Interesting to note that AUS-US swap spreads are
suggesting quite rich valuations for AUDUSD at prevailing rates, with an implied gap of about 650
pips. Also interesting is that AUD is trading with a higher correlation to the Kospi than KRW is
showing, and with EM seeing massive foreign capital outflows and rising “bad” inflation, perhaps
this is another harbinger of an extended sell off in Aussie. RBA Governor Glenn Stevens out with
some dovish comments that weighed down on AUD on Friday, but the reaction appears a bit
excessive. I am hesitant to get outright short AUDUSD unless I see some technical breakdown, and
for now I sit agnostic. Chinese CPI print tomorrow should move the pair, particularly if it comes in
on the higher end, suggesting more tightening in store.

February 14, 2011|2

Below is a chart showing the high correlation between the Aussie (in blue) and Korean equity (in
red), as well as a nice chart from GS’s John Noyce highlighting the overvaluation of AUDUSD
relative to swap spreads. Apologies for the “fuzziness” of the Noyce chart.

US 5yr TIPS inflation compensation is now back to 200bps (orange line, LHS), while short(er)-end
rates look to be on the rise for the first time in a while (blue, LHS), and 2s10s (red, RHS) are
steepening in tandem. With the economy strong, EM underperforming, US yields rising, and no
signal of QE2 being extended, USD could be poised to rally here. The recent breakout in USDJPY
could signal a shift of carry funding back to the JPY, as the summer 2010 double-dip fear-induced
USDJPY plunge is unwound. US growth risks + Fed bid for USTs led to a big selloff in USDJPY from
last summer; with the opposite in effect now, the shift in carry funding thesis looks sound.

February 14, 2011|3

And if the MIT Billion Prices Project data shows any significant leading indicating strength, CPI
prints are set to tick up even higher, making US real yields decline further (which further lessens
the likelihood of additional monetary action from Bernanke), nominal yields higher, curves steeper,
and (a tad paradoxically), USD higher. There is far too much spare capacity and too little inflation
for inflation prints to be a bigger driver of USD fluctuations than the Fed’s policies.

February 14, 2011|4

Switching gears to equity, I went long a variety of US stocks on Friday, many with some great chart
patterns and fundamentals to back them. Mercury Systems (MRCY), for example, posted a great
high-volume bounce off its 55d on Friday, and looks set to move to the upside out of its three-
month base. It is fresh off of a terrific earnings report on January 26, which rocketed the stock 14%
higher on the day, as EPS grew 175% YoY and sales grew 23% YoY. At a mere 19x multiple (low on
its 5yr 9x-150x range), clear accumulation on the chart, and only 7% off 52wk highs, MRCY looks
very bullish and I’m long in size.

Mobile computing and application development is definitely a fast-growing industry presently, and
smart device software developer, engineer, and consultant B Square (BSQR) is seeing the positive
effects of it, with earnings jumping back into the black this past summer and continuing the trend
in its November report. It is showing a nice, round bounce off its 55d and has been showing clear
accumulation since its earnings report in November. BSQR is about 11% off its 52wk highs and
looks great for a surge right through into new highs. Q3 sales were up 55% YoY and both top- and
bottom-line have started a strong uptrend ever since June.

February 14, 2011|5

Tomorrow brings:

 December Eurozone IP (5:00 AM EST: +0.0% expected | +1.4% prior – MoM)

 February RBA board minutes (7:30 PM EST)
 January Chinese CPI (9:00 PM EST: +5.3% expected | +4.6% prior – YoY)

Best of luck trading.

Naufal

February 14, 2011|6

 Trades
OPEN
Long /ZW | 690.00 | stop 675.30 | +27.54%
Long /ZC | 550.00 | stop 541.90 | +28.82%
Long /CT | 150.00 | stop 138.50 | +29.33%
Long OIH | 140.65 | stop 135.00 | +10.02%
Long MXIM | 25.02 | stop 24.45 | +6.47%
Short ACOR | 28.90 | stop 30.60 | +20.41%
Long ERJ | 30.10 | stop 28.90 | +12.62%
Long TDY | 45.05 | stop 44.85 | +12.21%
Long TITN | 21.30 | stop 20.45 | +25.12%
Short AUD/NOK | 5.850 | stop 5.915 | -30 pips
Long WBS | 21.05 | stop 20.05 | +11.14%
Long /ZR | 14.64 | stop 14.20 | +11.27%
Long NE | 37.65 | stop 36.50 | +3.35%
Long CAB | 23.40 | stop 22.75 | +17.52%
Long TSLA | 23.95 | stop 22.05 | -2.92%
Long /CL | 86.30 | stop 83.80 | -0.93%
Long UA | 57.55 | stop 51.55 | +21.30%
Long MEE | 55.55 | stop 51.00 | +13.57%
Long IAG | 19.55 | stop 18.50 | +4.09%
Long CRR | 114.33 | stop 105.00 | +5.99%
Long CNQ | 43.65 | stop 42.55 | +0.41%
Long MOO | 56.35 | stop 55.15 | +2.07%
Long SOHU | 80.04 | stop 73.00 | +11.04%
Long CF | 140.60 | stop 136.05 | +6.93%
Long SINA | 87.55 | stop 77.50 | +6.41%
Long BIDU | 118.30 | stop 113.00 | +9.54%
Long MSFT | 27.90 | stop 26.95 | -2.33%
Long TYO | 46.70 | stop 45.00 | +3.43%
Long AMRN | 8.85 | stop 7.65 | -7.68%
Long DECK | 79.92 | stop 77.00 | +7.67%
Long LULU | 75.15 | stop 71.45 | +12.19%
Long CMG | 240.67 | stop 232.40 | +11.66%
Short FCX | 56.05 | stop 57.80 | +4.51%
Long DNR | 21.60 | stop 20.10 | -1.06%
Long MAC | 49.01 | stop 47.65 | +0.73%
Long A | 44.34 | stop 40.00 | +1.53%
Long PCLN | 440.72 | stop 423.00 | +3.32%
Long WLL | 126.04 | stop 120.00 | -3.53%
Long AUDC | 7.98 | stop 6.95 | -3.13%
Long IMAX | 27.70 | stop 26.00 | -0.47%
Long TOL | 20.90 | stop 20.00 | +2.68%
Long VECO | 47.60 | stop 42.50 | +10.23%
Long CTSH | 76.83 | stop 72.50 | -1.73%
Short SCCO | 45.06 | stop 47.60 | +1.46%
Short WLT | 121.55 | stop 128.70 | +1.91%
Long LEN | 21.10 | stop 20.25 | -0.90%
Short AUD/SGD | 1.2905 | stop 1.2995 | +95 pips
Long URRE | 3.30 | stop 2.85 | -5.76%
Long UEC | 6.28 | stop 5.55 | -1.59%
Long USD/JPY | 83.00 | stop 81.75 | +20 pips
Long CAD/JPY | 83.55 | stop 82.50 | +80 pips
Long SGD/JPY | 64.95 | stop 64.30 | +5 pips
Short EUR/USD | 1.3605 | stop 1.3760 | +70 pips
Long USD/CHF | 0.9650 | stop 0.9540 | +70 pips
CLOSED
Short ECH | 73.40 | cover 70.61 | +3.80%
Long CNP | 15.85 | sell 16.21 | +2.27%
Long RELL | 12.80 | sell 12.95 | +1.17%
Long EDZ | 21.83 | sell 22.97 | +5.22%
Long UGL | 61.90 | sell 64.15 | +3.63%
Long SLW | 31.40 | sell 34.40 | +9.55%
Long CLF | 88.15 | sell 87.70 | -0.51%
Long CZI | 15.12 | sell 16.18 | +7.01%
Long SHZ | 6.85 | sell 6.78 | -1.02%
Short AUD/USD | 1.0155 | cover 0.9995 | +160 pips
NEW
Long MRCY | 18.70 | stop 17.75
Long GOOG | 618.05 | stop 595.00
Long BSQR | 10.60 | stop 9.35
Long PRGO | 72.76 | stop 71. 20
Long TTMI | 18.12 | stop 17.45
Short EUR/CAD | 1.3475 | stop 1.3580
Short AUD/CAD | 0.9925 | stop 1.0030
Long JBL | 21.60 | stop 21.00
Long CRUS | 23.77 | stop 23.10
Long JOBS | 57.00 | stop 55.00
Short GME | 20.22 | stop 21.25
Long MSB | 33.98 | stop 32.45
Short MMYT | 28.85 | stop 30.10
Long CHK | 30.65 | stop 28.50
Long NOG | 28.11 | stop 26.55
Long CTXS | 69.61 | 65.05
Long HAWK | 7.71 | stop 6.90
February 14, 2011|7
Long SDS | 21.15 | stop 19.90
Short SPY | 133.10 | stop 136.00
Short QQQQ | 58.45 | stop 60.10

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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.

February 14, 2011|8