t Shadow Capitalism

line would imply a very sharp decline in USD, almost double

the magnitude of the decline since Eurozone concerns eased
in June. I expect a rally in USD from current levels but do
MARKET COMMENTARY BY NAUFAL SANAULLAH
expect (probably sometime in 2011) for this important
triangle to be breached to the downside, ushering in a new
Friday, November 5, 2010
wave of USD selling. For now, a break above 77 would be
bullish in the near-term and above 78.50 indicating a
Private payrolls beat, reflation trade back on, EUONIA back
potential rally in the making. The 55d and 200d remain
below 50bps
significant S/R levels to watch and have been defining USD
trends very well. If USD rallies from here, risk could see
Big win for the bulls on Friday, as NFP came in at +151k for
correction, especially in the current cycle leaders:
October vs +60k expectations, with the private sector adding
commodities and metals.
159k payroll jobs last month vs 80k consensus. Risk assets
powered ahead, although USD was bid as expectations of
sizable further QE diminished on the back of the good data.
However, household employment fell by 330k and full-time
employment by 124k, both of which are now negative YoY.
This casts doubts on the sustainability of positive upside labor
data surprises like this one, as well as the efficacy of easing in
helping the labor market. More bullish (in my opinion) was
the September consumer credit data, showing a $2.1b
increase vs an expected $3.0b decline.

The S&P ended the day up about 0.4% and the week up about
3.6%, breaking April highs just under 1220. This adds
confirmation to the breakouts in SPY, DJIA, Nasdaq
Composite, and other broad market indices and ETF proxies.
Equities look very bullish on weekly charts, after last week’s
five consecutive up days, although the S&P now sits at the
61.8% Fibo retracement from 2007 highs. If 1200 holds, we
should see another 100 points in the S&P before this bull
cycle is over; if we break back down and breakouts are
reversed, 1120 will be the level to watch to determine future
direction.
Speaking of commodities, crude posted some more follow-
through on Friday from its recent breakout around $84/bbl. It
is sitting at April highs around $87/bbl and although a near-
term correction is possible (and likely), the chart is looking
very constructive on a longer-term horizon, and I will be a
high-conviction long above 87. Core CPI remains low but food
& energy prices, although volatile, seem to be bucking the
trend, indicating inflation may be creeping into inputs. The
$85-90/bbl zone is very significant, representing pivotal
support and resistance in 2007 and 2008, so how crude acts
in its current price zone will be very telling in regards to
future price action. Spare capacity is set to plunge in 2011
and going forward, even when assuming rather meager
demand growth rates, and the “offshore hoarding”/contango
basis trade is all but unwound, revealing a bullish
supply/demand picture to support the thesis.

The recent surge in risk has obviously been fueled by the

sharp decline in USD since around Bernanke’s Jackson Hole
speech. However, Friday saw a strong rally in USD, fueled by
renewed Eurozone periphery concerns and bullish US data,
and the Dollar Index appears poised for a reversal at current
levels, sitting at long-term trendline support. A breach of this
Leading oil/energy stocks have already taken off and are
driving the market higher as a whole. Below are some very
bullish charts that I’m long, some of which I bought just on
Friday. I expect near-term corrections in these, perhaps
starting as early as tomorrow, but am seeing very
constructive longer-term charts.
Long bond yields are rising, with the 30yr yield up about 65
bps since summer lows. As the QE thesis wanes, synthetic
UST demand from the Fed gets factored out of the price
discovery mechanism and underlying supply/demand
processes reassert themselves. This, as I’ve stated several
times in the past, is going to be bearish for bonds, and I think
that the current rally in yields will continue and increasingly
move down the curve. After being long the 10s30s steepener
for weeks, I’m closing the long 10yr portion and remain short
30yr Treasury bonds. The bond bubble will burst in 2011.
As US yields rise, USDJPY will see bullish action due to rates
differentials reversing. This will see a pick-up in momentum
as inflation rises, as well, particularly in food/energy/inputs. A
move through the descending channel resistance line (and/or
55d) will confirm a rally and I suspect USDJPY may be in the
process of making a very significant bottom, as it sits on 1995
lows. I think the yen will see a strong move down in 2011-
2012 and JGBs to follow, spurring some real concerns in
Japan in the next three years. However, a weakening yen with
short-term rates so low (especially if longer-term yields rise
as I suspect, allowing curve steepening to exacerbate all of
these moves) will be great for carry funding and I expect yen
weakness going forward to contribute to inflating asset
prices, particularly in energy/food assets.

So if energy prices are headed higher and the yen is in the
process of a significant top, then the obvious FX trades to put
on are in CADJPY and NOKJPY. Sure enough, I’m already long
both and the technicals remain constructive, especially in
CAD. Below is USDCAD, which is sitting at very significant
support just below parity. Though USD is likely to see a
bounce in the near-term, I expect USDCAD to take out its
lows by year-end, an event that would be very supportive for
oil prices. Such a breakdown implies a selloff to around 0.92,
levels not seen since 2007.
Similar scenario in USDMXN, sitting on important support and
appearing poised for an eventual breakdown after a
possible/likely retracement bounce. Even better is MXNJPY,
which I went long on Friday.
But enough about oil. The euro sold down hard on Friday as
periphery concerns reemerged, with Irish CDS spreads
making new highs. More importantly, however, EONIA
continued to tick down considerably, down below 50bps to
45.6bps now. Just late last month, it was well over 80bps and
within arm’s reach of the ECB refi rate of 100bps. This is very
bearish in my opinion and I am short EURUSD on the back of
this development combined with Friday’s 200+ pip selloff. I
also shorted euros against commodity currencies (CAD, NOK,
& AUD specifically), as a USD-neutral expression of my
presently bullish sentiments toward energy commodities and
because of confirming chart developments. Expect QE-thesis
profit taking tomorrow ahead of German trade balance data,
as well as ahead of Friday’s Eurozone GDP release, the former
of which I expect to be quite bearish.
I am concluding tonight’s piece by talking about two major
equity indices—America’s S&P 500 and India’s Nifty Fifty. As
per the S&P, a significant historical correlation has been with
US household net worth as a percentage of GDP, particularly
when looking at real S&P 500 values. Below is a chart with US
household net worth/GDP (blue) mapped onto the S&P (red),
albeit not inflation-adjusted. As is evident, households saw
their net worth as a percentage of GDP rise from 2009 lows
to about dotcom crash lows, but have seen it tick back down
since then. Unless this ratio recovers to back above post-
dotcom lows, households are in for more pain and equities
should follow suit. The ratio typically sits between 3.0 and
3.6, but Greenspan/Bernanke Feds have taken it far above
and back down to these levels.
Projected 10yr returns, as per both dividend ratios and
earnings ratios, are very meager, sitting around 3% (chart
below courtesy of John Hussman), and I wouldn’t be
surprised to see the S&P around current levels in ten years, at
least when adjusted for inflation.
As per the Nifty Fifty, we are now at a strange crossroads
where prices are surging, yet the likes of PTJ and Rogers both
mentioned short India theses within the span of a week. The
fundamental thesis is not too well-supported, although
wholesale price inflation above 15% (even after sharply
declining this past summer) and 5yr OIS trading above 700bps
can’t be great news looking forward for the RBI, which hiked
rates in its last meeting. More importantly are the technicals,
however, which Jones suggests are analogous to 1999 levels
and action in the dotcom bubble. I’m staying out of shorting
India anytime soon but I’m throwing it on my list of trade
ideas for 2011.
OPEN TRADES
Short APOL | 51.90 | stop 54.00 | +31.16%
Short STRA | 160.00 | stop 165.00 | +15.27%
Long TBT | 32.65 | stop 31.80 | +8.06%
Short /ZB | 133’24 | stop 135’15 | +3’02
Long AMZN | 159.10 | stop 152.00 | +7.34%
Long VECO | 39.00 | stop 36.30 | +12.82%
Long YHOO | 15.65 | stop 15.35 | +3.96%
Long /ZC | 559.10 | stop 511.25 | +4.99%
Long USD/JPY | 80.75 | stop 79.85 | +55 pips
Long ACAS | 6.67 | stop 6.25 | +14.84%
Long MSFT | 25.20 | stop 24.85 | +6.55%
Long GRA | 30.04 | stop 29.80 | +11.95%
Long F | 14.25 | stop 13.85 | +13.75%
Short EUR/NZD | 1.8370 | stop 1.8650 | +620 pips
Short GBP/NZD | 2.0885 | stop 2.1900 | +445 pips
Long CAD/JPY | 79.60 | stop 78.55 | +160 pips
Short PWER | 10.58 | stop 11.40 | +12.43%
Short EUR/CHF | 1.3725 | stop 1.3910 | +210 pips
Long BRKR | 14.80 | stop 14.45 | +3.72%
Long AIG | 43.49 | stop 41.00 | +4.87%
Short BP | 42.40 | stop 44.80 | -3.28%
Long MUR | 66.01 | stop 62.90 | +2.77%
Long ELP | 24.26 | stop 23.10 | +2.64%
Long /SI | 25.21 | stop 24.90 | +6.78%
Short GBP/JPY | 131.00 | stop 132.50 | -35 pips
Long NOK/JPY | 14.03 | stop 13.90 | +10 pips
CLOSED TRADES
Long /ZN | 125’15 | sell 127’17 | +2’02
Long LUV | 13.34 | sell 14.19 | +6.37%
NEW TRADES
Long CNQ | 39.35 | stop 37.95
Long CEO | 226.96 | stop 210.55
Long MXN/JPY | 6.60 | stop 6.45
Long NZD/SGD | 1.0140 | stop 1.0035
Short EUR/USD | 1.4170 | stop 1.4275
Short EUR/CAD | 1.4145 | stop 1.4205
Short EUR/AUD | 1.3995 | stop 1.4105
Short EUR/NOK | 8.120 | stop 8.180
Short QQQQ | 53.60 | stop 54.40
Long GU | 1.03 | stop .93
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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.