rushed bailout designed and structured at its heart with the

Shadow Capitalism top priority of limiting further contagion. The markets

shrugged off the developments, with periphery bond spreads
MARKET COMMENTARY BY NAUFAL SANAULLAH
rising again today, in stark contrast with the reaction to the
Greek aid. This leads me to believe that the market has
Monday, November 29, 2010
crossed the threshold of welcome liquidity injections and will
now only react positively to truly fundamental news.
Does Ireland = Eurozone’s Indymac moment?
Considering Thursday’s ECB meeting was originally designed
The EU & IMF agreed on a €85b bailout package for Ireland to lay out exit plans from ECB support mechanisms, the
on Sunday, and as I expected Germany’s desires for senior market is calling the political system’s bluff and the skeptical
bondholder haircuts for Irish bank debt investors were left pessimism exhibited in response to any proposed EU facilities
unsatisfied (this, of course, does mean that subordinate is similar to the threshold crossed by the FDIC’s takeover of
debtholders will likely face sharper haircuts than originally Indymac in July 2008. In this context, Bear Stearns (with its
thought). The bailout involves €22.5b each from the IMF & consequent strong rally in the indices from March to May
EFSM, €17.5b from the EFSF, €5b from bilateral loans (from 2008, based on “worst-is-over” sentiments), correlates with
the UK, Sweden, & Denmark), €12.5b from the National Greece (and the euro’s 2000 pip rally and “exit strategy” talk
Pension Reserve Fund (more than half of its current size), and from the ECB). Ed Harrison actually made the analogy before
€5b from state cash reserves; with €35b being used for bank me, so credit to him, but I think it is a very useful comparison.
recapitalization and €50b for sovereign budget funding. The It is important to remember that the US stock market crashed
average rate, if drawn today, would be 580bps, but as several just ten weeks after the Indymac moment.
observers have noted, if the interest-free funding from the
More and more it is appearing that monetization by the ECB
NPRF & cash reserves are accounted for, the effective
is all that is left to occur, especially given that the Irish bailout
borrowing costs would be >700bps.
did nothing to quell contagion risks spilling over to the
The conditions for the sovereign portion of the bailout were Iberian. I noted in a piece last week that anti-US/QE backlash
in-line with the 4yr budget proposal released last week, as may be a political platform from which Berlin could justify
expected due to IMF/EU backing. As long as Cowen’s coalition easing, and in fact, Russian PM Vladimir Putin seems to be
can prevent every single opposition MP from voting against recognizing just that, as he called for increased German-
the budget (unlikely, given that even one abstention Russian economic trade today, and issued harsh statements
undermines the threat and that two independents will be about the current dollar hegemony. Spain is too big for the
voting with Cowen), the December 7 budget vote will mark EFSF yet big enough to warrant Bundesbank haws to agree to
the official affirmation of the bailout. Give the multilateral inflationary ECB policy, and no effective options remain to
and layered structure of this bailout, in contrast with the US’s address the increasingly near-term Spanish crisis. This is a big
various bailouts, the budget vote likely won’t be an event reason why I had (and continue to hold) such high conviction
upon which the near-term direction of the euro hinges. in shorting the euro, because in a QE scenario, the bond
spreads may compress, but the euro would actually decline
Concurrently, Eurogroup introduced the European Stability further. And of course, a Spanish default would make the
Mechanism (ESM), which will replace the ESFS in mid-2013. entire EMU’s existence suddenly up in the air. The “Indymac”
All EMU member sovereign paper issued post-ESM moment was what I was waiting for to confirm it and the
introduction will carry CACs that introduce the potential for muted response to the Irish bailout provided me just that. QE
sovereign bond restructuring with private sector would also help distinguish insolvent from illiquid, important
involvement, while the ESM will only grant funds to for Germany in justifying populist-driven aggressiveness in
sovereigns that pass a joint ECB/EC/IMF debt sustainability external policy (which will become increasingly significant and
test. Additionally, Olli Rehn announced that the EC will be politically-driven, given that Hamburg’s CDU-Green coalition
proposing to extend Greece’s bailout package maturity by 4.5 collapsed over the weekend, setting the stage for no less than
years. seven state elections next year).

However, none of this seemed to quell any contagion risks in And lest we forget, Italy & Belgium are now officially in the
the market. The Irish bailout went against the wishes of a crosshairs as well, the former with the second-largest
majority of polled Irish citizens and included a very significant deficit/GDP—after Greece—in the EU and the latter with no
gutting of the state pension fund, and overall seemed to be a effective government since the summer and significant
periphery exposure. Italy’s debt auctions today showed we could see a real challenge of a 1200 breakout soon. Dallas
significant yield appreciation from late October auctions, Fed Manufacturing Activity for November came in at 16.2,
while Belgium fell €500m short of its €2.5b goal in its debt greatly beating expectations of 4.5, and the two Fed POMOs
issuance today. To add to the political crises in Belgium, helped the bulls case as well today. I remain cautiously long
Portugal Spain, Greece, & Ireland, Italian PM Silvio Berlusconi US equity to hedge my pervasive short-risk exposures across
faces the confidence vote in mid-December, following the the globe, and think it’s early to top-call until leading stocks
passage of budget, which he sought to restore confidence in stop showing fresh breakouts and follow-throughs.
his coalition, setting up a potential general election next year.

Stepping outside of the Eurozone for a moment, the new

headline Wikileaks cablegate release pertains to 19 missiles
obtained by Iran from North Korea that would presumably
provide the “building blocks” for creating long-range missiles.
Meanwhile, S Korean President Lee Myung Bak addressed
populist outrage of the government’s weak handling of the
DPRK attacks by promising that “North Korea will be made to
pay for any further provocation no matter what.” China
remains adamant about its proposals for resumption of talks
between the members comprising the former Six-Party Talks,
with PRC’s Foreign Affairs Vice Minister Wu Dawei repeating
those calls today. Conflict tensions continue to rise in the
Korean peninsula and it appears that the breaking point has EURUSD continued its selloff today into its sixth consecutive
finally been reached where another attack from the North session, although I think it may find a near-term bid at its
puts the region on the brink of literal war. The Wikileaks 200d and 50% Fibo retracement from October highs, both
releases and heightening Korean tensions are bullish oil, around 1.31. A bounce to its 61.8% Fibo level around 1.335-
which posted another strong rally today, as well as uranium 1.36 would provide a nice short/sell entry for those inclined.
prices, an equity proxy of which I went long last week ahead Additionally, EURCHF has significant support at 1.306, which
of >9% gains today. marked cycle lows in June & September, while EURGBP shows
Fibo support as well and EURAUD shows long term support. It
Further PBoC tightening risk, exacerbated today by inflation- may prove costly to chase short-euro trades here, especially
hawkish statements from the China State Council, are putting since a lot of traders were caught short on the gap down,
a damper on EM/NJA risk, poorly timed to be concurrent to which gave way to intraday rallies in risk during the US
heightening Korean tensions. With AUDUSD now decisively session. As you may have suspected, I expect rallies here to
below its 55d and talk of RM position unwinds/liquidations, it be short term and countertrend. A long position in EURAUD
appears that Asian risk (and its proxies) will be led on the way may not be a bad punt here, especially if hedging a
down by inflation/hiking risk and on the way up by US equity preexisting EURUSD short, as unwinding the trade via further
and oil. High school riots and plunging demand for expensive EURUSD selling leaves the portfolio with nice entries in short
food, whose price inflation is running above 10% right now in both EURUSD and AUDUSD.
China, represents rising risk of social unrest, which is why
tackling the inflation/food crisis is priority #1 for the PBoC,
although at the expense of a very much liquidity-fueled
property sector, whose decline has significant ramifications
across the waters in Australia. This issue is also very pertinent
to consider in the context of the Korean concerns.

The S&P shrugged off a gap down today, posting a strong

bullish reversal off of its 55d and significant support at 1170.
The 1170-1200 zone remains the important consolidation
area from which a breakout or breakdown would presumably
provide significant directional context. Given the no-
confidence vote extended to the Irish bailout by the market,
such a rally seems relatively bullish all things considered and
NZD looks good for a trade here, as the combination of Q3 Swedish GDP posted significant prints today, up 2.1% QoQ
significant support from previous resistance, trendline vs 1.2% expected and up 6.9% YoY vs 5.4% expected. I
support, and the 38.2% Fibo retracement, all coming in right responded by selling some GBPSEK at 10.905, to add to my
around the 74 big fig, make it attractive near-term from a underexpressed bearishness in GBP vs a strong currency by
technical perspective. Given important S/R around 1.2950, relative and absolute fundamental and technical analysis.
short AUDNZD may be a good expression of that thesis, again Sweden, along with Denmark and the UK, was one of three
especially if one considers current bounces countertrend and nations to provide multilateral support for the Irish bailout, as
uses them to unwind via selling NZDUSD and being left with well as provided aid for Latvia and Iceland. This goes along
attractive risk-adjusted entries for AUD bearish expressions. way and is cementing Sweden as a regional safe haven
GBPNZD, a trade I’ve tried before, also looks attractive from competing against the heavyweight Germany, which is
the short-side, with a potentially longer permissible showing aging demographics, massive political divisiveness,
timeframe for holding as well. an export model being harassed by beggar-thy-neighbor
competitive debasements, and incessant bailout demands
from the periphery. A Riksbank hike mid-next month appears
likely and would further the bull case. The Swedish model
successively addressed the banking crisis and the negative
rate on reserves effectively prevented a liquidity trap, and
Sweden is one of the few sound economies and financial
systems remaining to qualify for true safe haven status,
especially in the European area.
 concerning a “big U.S. bank,” on the magnitude of tens to
hundreds of thousands of documents, is due for release early
next year. Should this bank be Goldman Sachs, JP Morgan, or
the like, and should this release by damning in one way or
another, this could be a very significant development. It could
equally as likely be a non-event, even if the material is juicy, if
it isn’t market-substantive. However, Assange claims very
high substantive value in the leaks, likening it to the “Enron
emails,” stating that: “It will give a true and representative
insight into how banks behave at the executive level in a way
that will stimulate investigations and reforms, I presume.” I
am anxiously awaiting their release, out of sheer curiosity
alone.
With milder-than-expected meteorological outlooks, natgas
took a tumbling today, erasing the optimism budding from To close, I’d like to bring up an old topic: PMs. In the event of
recent constructive technical action and outperformance in QE from ECB, gold surges. In the event of sovereign
the energy complex. The potential head & shoulders restructuring, gold surges. Are either fully discounted (or at
development in oil likely had many traders shorting ahead of any significant level? I don’t think so. I’ll be watching to see if
a hoped breakdown, and probably seeing the potential for a gold invalidates its H&S like oil did today and/or if silver
reversal in the long oil/short natgas trade that has been a breaks out of its triangle pattern soon. Just to be clear, I am
common theme since the commodity bubble collapsed in (and have been for a long time) bullish gold, on the dual
summer 2008. However, the trade betting on the spread theses of heightening sovereign credit risk (on all fronts) and
unwind got killed today, as crude futures broke out through eventual inflationary risk from monetary easing (which is just
$85/bbl (invalidating the H&S), crude ETFs broke out through beginning to pop up, in EM, a bit earlier than I’d expected).
their 200d, and natgas broke back below its 200d. I went long However, I do think that the end game is for a bubble to
crude and short natgas for a pair trade today, while shorting a develop in gold (as I see it more prone than almost any asset
couple natural gas equities to pair my oil stock longs. Also to psychological/sentiment/paradigm shifts) and a parabolic
important is recent CAD outperformance during the rush to surge sometime within the next 5-12 years, only to crash just
USD, which has left support at 9950 still very challengeable in as hard. The top in gold will likely coincide with a bottom in
USDCAD, and any bout of USD weakness could lead to new US Treasurys, and I will be the guy selling all of his gold once
highs for the Canadian Dollar, which ties in well with my oil the parabolic move shows some significant high-volume
bullishness and recent geopolitical stresses. A break through multi-trendline breakdowns, and using those USDs to pick up
9950 could send CAD surging to levels not seen since 2007 Tsys trading at deep discounts most likely. From there, I’d
highs. Below is an ETF-based reconstruction of the short expect gold to plunge right back to $400-500/oz or so, and
oil/long natgas spread-unwind trade. stay dormant until the next wave of credit and/or spending
excess leads to similar crises. The charts will tell. But the key
point to drive home is: I don’t believe in “good” or “bad”
assets, I only believe in a good time to buy/short and a
BETTER time to sell/cover. And to top off the discourse about
QE/bailouts, I’d like to quote Paul Krugman in his amusing
characterization of the Irish crisis (which explains exactly why
the market has now officially called the EU’s bluff):

It’s as if we’re having the following dialogue:

“Ireland really can’t afford to pay these debts.”

“Here’s a credit line!”
“No, really, we just can’t afford to pay.”
“Here’s a credit line!”

Big news out of Forbes today, as an interview with Wikileaks It really is like watching a car wreck.
editor-in-chief Julian Assange indicates that a “megaleak”
 OPEN TRADES Long NG | 14.05 | stop 13.50 | +0.36%
Long SLW | 34.80 | stop 32.80 | +2.96%
Short APOL | 51.90 | stop 54.00 | +33.91% Long DNN | 2.85 | stop 2.60 | +11.58%
Long VECO | 39.00 | stop 36.30 | +17.18% Long CIE | 10.85 | stop 10.10 | +3.69%
Long USD/JPY | 80.75 | stop 79.85 | +330 pips Long URRE | 2.90 | stop 2.50 | +20.34%
Long ACAS | 6.67 | stop 6.25 | +8.85% Long STT | 43.50 | stop 41.80 | +0.46%
Long CAD/JPY | 79.60 | stop 78.55 | +290 pips Long PCAR | 54.95 | stop 52.00 | -1.42%
Short EUR/CHF | 1.3725 | stop 1.3490 | +645 pips Short FRO | 26.10 | stop 27.00 | -0.69%
Short BP | 42.40 | stop 44.80 | +4.27%
Long CEO | 226.96 | stop 210.55 | -2.23% CLOSED TRADES
Long USD/HUF | 195.45 | stop 192.70 | +215 pips
Short X | 47.30 | stop 49.25 | -1.04% Long SBUX | 30.25 | sell 30.60| +1.16%
Short ACOR | 28.00 | stop 28.70 | +4.32% Long EL | 72.00 | sell 75.00 | +4.17%
Short /HG | 4.06 | stop 4.15 | +7.14% Long VIA.B | 37.35 | sell 37.60 | +0.67%
Short AUD/USD | 0.9980 | stop 1.0075 | +360 pips Short FCX | 99.95 | cover 98.50 | +1.45%
Long SGD/JPY | 63.60 | stop 62.95 | +15 pips Short SCCO | 42.75 | cover 42.30 | +1.05%
Long SNE | 33.70 | stop 32.30 | +3.86% Short DB | 52.60 | cover 48.55 | +7.70%
Long HIT | 47.35 | stop 44.80 | +0.46%
Long /NKD | 9768.00 | stop 9686.00 | +2.17% NEW TRADES
Short REV | 10.50 | stop 11.20 | +4.57%
Long EK | 4.79 | stop 4.30 | +1.04% Short CCE | 24.00 | stop 25.75
Long AMR | 8.22 | stop 7.90 | +3.16% Long /CL | 85.00 | stop 82.80
Long N | 24.00 | stop 23.20 | +6.42% Short /NG | 4.33 | stop 4.55
Long EXXI | 25.50 | stop 23.35 | -0.16% Long SINA | 63.75 | stop 62.05
Long LVS | 49.30 | stop 43.50 | +2.43% Short JKS | 25.65 | stop 27.90
Long GOOG | 591.00 | stop 579.50 | -1.50% Long CLW | 80.80 | stop 78.50
Long TGA | 14.65 | stop 13.45 | +14.20% Long IO | 7.03 | stop 6.64
Long NOG | 22.20 | stop 21.80 | +2.84% Long /ZW | 690.00 | stop 675.30
Long USD/SGD | 1.3085 | stop 1.3015 | +125 pips Long /ZC | 550.00 | stop 541.90
Long AAPL | 307.50 | stop 395.35 | +3.05% Long BHP | 82.55 | stop 80.90
Long CSTR | 63.45 | stop 58.15 | +3.34% Long MOTR | 30.90 | stop 26.30
Long MAT | 25.25 | stop 24.80 | +1.70% Long NZD/USD | 0.7440 | stop 0.7390
Short ARG | 63.50 | stop 64.90 | +2.76% Short GBPSEK | 10.905 | stop 11.115
Long DG | 32.35 | stop 31.30 | +1.33% Short EOG | 89.00 | stop 93.10
Long SNDK | 42.95 | stop 40.35 | +5.29% Short CHK | 22.00 | stop 22.70
Long SSYS | 33.50 | stop 33.10 | +2.06% Long EURJPY | 110.05 | stop 109.35
Long CMCSA | 20.15 | stop 19.70 | +0.30%
Long REGN | 29.25 | stop 28.35 | -1.95%
Long VSAT | 40.75 | stop 39.90 | +1.28% If you would like to subscribe to Shadow Capitalism Daily Market
Short LMT | 68.30 | stop 69.50 | +0.15% Commentary, please email me at [email protected] to be added to
the mailing list.
Short XRX | 11.50 | stop 11.90 | -0.87%
Long THRX | 21.65 | stop 20.55 | +16.40% DISCLAIMER: Nothing contained anywhere in this commentary, including
Short MT | 32.00 | stop 33.10 | +0.72% analysis and trade ideas, constitutes or should be construed as investing or
Short PIN | 23.75 | stop 25.00 | +1.14% financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
Long XEC | 81.00 | stop 78.15 | +0.72%
securities.
Long FWLT | 28.30 | stop 27.00 | +2.86%
Long GRA | 33.40 | stop 31.00 | +1.89%
Long UAL | 28.10 | stop 27.00 | +0.36%
Long VSH | 14.15 | stop 13.30 | +3.75%
Short GBP/USD | 1.5700 | stop 1.5850 | +150 pips
Long CHF/HUF | 208.00 | stop 205.00 | +90 pips