t Shadow Capitalism

Switching over to US equities, the market posted a bullish

hammer candle today after an early morning reversal off of
lows, extending gains in reaction to the Fed’s afternoon
MARKET COMMENTARY BY NAUFAL SANAULLAH
announcement of $105b in POMOs through year-end. As
extended as the market is at current levels and after its
Wednesday, November 10, 2010
recent moves, today was bullish from a technical standpoint
and may precede more gains, especially if University of
Data shows global imbalances grew ahead of likely-deadlock
Michigan Consumer Confidence is bullish on Friday. I remain
in G20 tomorrow
convictionless on US equity direction.

Big day in data today ahead of tomorrow’s geopolitical

theater in Seoul, with China leading the charge with less-
than-politically-palatable data. Its trade surplus surged in
October to $27.2b, a figure unlikely to lend PRC political
capital in deliberations tomorrow likely to be centered
around global imbalances in trade and exchange rates.
Perhaps even more importantly from an economic
standpoint, Chinese CPI grew to 4.4% YoY in October, 40bps
above expectations, the highest growth rate in two years.
Last night’s 50bp RRR hike likely was executed to serve the
dual purpose of addressing rising inflationary pressures while
posturing as “responsible” ahead of G20. Not to mention, the
After selling off ahead of and in reaction to a weak 30yr
lifting of minimum reserves helps neutralize QE2-based hot
auction, with a bid-to-cover of 2.31 and less than 40% indirect
money inflows (approximately 9% of the $600b in outright
involvement, USTs staged a strong reversal and rally into
Tsy purchases). But despite the back-and-forth between
session close on the back of the Fed’s announcement of
China and the US, the fact remains that both parties are
$105b in Tsy purchases through December 9. It appears the
exacerbating structural imbalances, and being incentivized for
QE trade may be back on as the opportunity to front-run Fed
polarily opposite policies, no substantive consensus will be
demand is again a proximate driver. The underlying
reached. China faults the US for its easing program, but it is
supply/demand picture for USTs remains bearish going
China’s RMB peg that leads to QE2-driven hot money inflows,
forward, and as QE liquidity becomes fully discounted, the
as the PBoC monetizes USD inflows as per its peg exchange
risk of rising yields expands (as has already been occurring on
rate. Meanwhile, the US blames China’s currency policy for its
the back-end of the curve). 10s30s steepeners remain buys
unemployment issues, ignoring the fact that NJA and other
on dips. In the near-term, however, we will probably get one
surplus exporters pick up China’s competitive advantage in
of these dips as bonds rally from recent lows.
the event of RMB revaluations (SGD and KRW have been
among the world’s best performers in FX in 2010), and that
domestic overconsumption imbalances (caused by low rates
and boundless liquidity) come at the expense of labor. More
acutely the concern regarding China is in how its inflationary
pressures will affect PBoC monetary policy. At this point in
China’s low rate- and liquidity-fueled boom (real interest
rates have been declining all year), an interest rate hike
would have significant effects, but simultaneously inflation is
only going to grow from here as the Fed’s policies continue to
promote hot money inflows into China and other nations.
Whether China gives in and revalues (and subsequently
lowers real rates) or hikes rates (and eliminates any In FX, USD saw a small correction as risk-on themes pervaded.
possibility of addressing exchange rate imbalances), the end CAD performed very well on the back of a surge in crude
game remains clear: a hard landing after its speculative boom prices, as did MXN, with my CADJPY and MXNJPY long
ends. The only question is a matter of when… and if there’s positions helping the PnLs. I continue favoring long
another leg left to its boom (from QE hot money). commodities expressions funded in JPY.

Quiet day in commodities today, except for a surge in oil
prices on the back of a 3.2m bbl drawdown in US crude
inventories, versus an expected 1.5m bbl expected increase.
Oil broke out of spring 2010 highs and its chart appears very
bullish here, especially as inflation is creeping up around the
world, China’s numbers helping the cause. Soybean futures
also rallied today, continuing its strong rally.
Copper hit 2006/2008 highs today, sending a very extended
rally into significant long-term resistance. The short thesis on
copper is very sound, as a terrific proxy to bet against the
Chinese and Australian property bubbles, but boundless
liquidity has prevented it the thesis from playing out thus far.
I went long crude today and funded it by a subsequent
copper short just a little bit ago. I don’t think that the
property bubble thesis is in play quite yet, as I expect it to
become an attractive trade in Q2 2011 or so, but current
levels present an attractive risk/reward opportunity as well as
a technically sound entry to get into an eventually larger-
trend move
OPEN TRADES
Short APOL | 51.90 | stop 54.00 | +29.42%
Long TBT | 32.65 | stop 31.80 | +11.76%
Short /ZB | 133’24 | stop 135’15 | +5’00
Long AMZN | 159.10 | stop 152.00 | +8.94%
Long VECO | 39.00 | stop 36.30 | +12.38%
Long YHOO | 15.65 | stop 15.35 | +8.38%
Long USD/JPY | 80.75 | stop 79.85 | +150 pips
Long ACAS | 6.67 | stop 6.25 | +12.14%
Long MSFT | 25.20 | stop 24.85 | +6.92%
Long GRA | 30.04 | stop 29.80 | +13.02%
Long F | 14.25 | stop 13.85 | +16.70%
Short EUR/NZD | 1.8370 | stop 1.8650 | +870 pips
Short GBP/NZD | 2.0885 | stop 2.1900 | +285 pips
Long CAD/JPY | 79.60 | stop 78.55 | +270 pips
Short PWER | 10.58 | stop 11.40 | +10.20%
Short EUR/CHF | 1.3725 | stop 1.3910 | +405 pips
Long BRKR | 14.80 | stop 14.45 | +3.92%
Long AIG | 43.49 | stop 41.00 | -1.25%
Short BP | 42.40 | stop 44.80 | -1.52%
Long MUR | 66.01 | stop 62.90 | +2.76%
Long ELP | 24.26 | stop 23.10 | +2.94%
Long CEO | 226.96 | stop 210.55 | -0.95%
Long MXN/JPY | 6.600 | stop 6.450 | +115 pips
Short EUR/USD | 1.4170 | stop 1.4275 | +400 pips
Short EUR/CAD | 1.4145 | stop 1.4205 | +375pips
Short EUR/AUD | 1.3995 | stop 1.4105 | +285 pips
Short EUR/NOK | 8.120 | stop 8.180 | +50 pips
Short QQQQ | 53.60 | stop 54.40 | -.28%
Long /NG | 4.05 | stop 3.83 | +1.73%
Long USD/HUF | 195.45 | stop 192.70 | +40 pips
Short SPG | 106.45 | stop 110.10 | +3.11%
Long NTES | 41.40 | stop 39.40 | -0.40%
Short NZD/USD | 0.7820 | stop 0.8005 | -30 pips
Long /ZS | 1286.55 | stop 1267.00 | +3.16%
Short X | 47.30 | stop 49.25 | -0.70%
Short AKS | 13.90 | stop 14.25 | +0.70%
Short ACOR | 28.00 | stop 28.70 | +1.46%
Short AAPL | 321.00 | stop 330.00 | +0.93%

CLOSED TRADES

Short GBP/JPY | 131.00 | cover 132.50 | -150 pips

NEW TRADES

Long PTR | 130.35 | stop 124.20

Short /HG | 4.06 | stop 4.15
Long /CL | 87.33 | stop 85.40
Short /CT | 151.50 | stop 160.35

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analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
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