Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Stocks surge on earnings beats and US IP & CPI, while China
naufalsanaullah@gmail.com
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hikes RRR and Tunisia leader ousted
All bullish on the western front on Friday, as a worse-than-expected 0.6% (vs 0.8% expected &
prior) December retail sales figure is overshadowed by a 40bps tick up to 1.5% CPI YoY in
December (vs 1.3% expected), a 50bps tick up to 0.8% IP (vs 0.5% expected), and earnings beats
from JP Morgan Chase and Intel. UofM consumer confidence ticks down to 72.7 this month (vs
75.5 expected and 74.5 prior), however, and the rising CPI + retail sales miss may offer more to
worry about than the market reflected on Friday. Meanwhile, the PBoC hiked its reserve
requirement rate by 50bps on Friday, its seventh since the beginning of 2010, to a new record 19%.
Considering the traditionally strong liquidity demand in January, the front-loading of Chinese bank
loan extension this year, and the fact that December saw the slowest property price increase in
over a year, the RRR hike and continued hawkish stance of the PBoC could spell inflation pressure
forcing the CB to tighten when the investment-driven economy may not be quite ready for it yet.
In the biggest news of the weekend, Tunisia President Zine El Abidine Ben Ali was ousted and fled
on Friday, after inflation- and corruption-attacking protests and riots led to his regime’s downfall.
Egyptian shares were down on Friday on fears of contagion.

The S&P rallied another three-quarters of a percent on Friday, closing above 1293 and now less
than seven points away from my target level of 1300 I have been mentioning since September of
last year. AAII shows a very high 52.3% bullish in its sentiment survey, and I am starting to really
like 1300 as a level to short into with tight stops. A VIX near previous significant lows around 15
and corp default rates also near previous cycle lows (while floating rate funds see record inflows)
furthers the bearish case at 1300 after an almost uninterrupted 10% climb since November.

January 17, 2011 |1

EURUSD stalled at the important 1.34-1.35 pivot I mentioned in my last piece (also marking the
55d & 100d), after a big rally last week in both FX and rates (which keep in mind was partially due
to positioning, with 6mo highs in EUR longs getting squeezed). The rise in euribor rates, especially
when combined with the five big figs rally in EURUSD, isn’t the most constructive variable for the
European economy, and similar action throughout the world could lead to default rate spikes. In
fact, yields are on the rise globally, which is one of the reasons metals have started breaking down,
while the unwind of bearish European sovereign trades have also helped contribute, as the chart
below (of gold, via the GLD ETF, priced in euros, via the FXE ETF proxy) shows.

AUD sold off sharply on the RRR hike, and after a temporary blip above parity, AUDUSD is back
below 99c and looking like a double top at 1.02. AUDCAD, which I am short, is down almost two big
figs since the hike, while my new short from Thursday—AUDNOK—sold off significantly as well.
With property prices increasing only 6.4% in December (vs 7.0% expected and 7.7% prior) and
rising global inflation making further PBoC hawkishness likely, AUD may be putting in a long-term
top around here and parity may not be breached on a significant basis for the rest of the year.

January 17, 2011 |2

January 17, 2011 |3
The housing double-dip in the US is definitely underway, much to chagrin of the Federal Reserve,
and housing continues to remain the largest asset holding of the US household base, rendering
much of the stock-driven “wealth effect” ineffective. With housing plunging and US stocks looking
a bit extended, I think 10yr notes may be poised for a rally here, and a break below 325bps should
send 10yr yields reversing back to their 200d. However, I remain bearish on UST’s as an asset class
and continue to look at 2011 as a pivotal point in the paradigm shift away from Tsys as a safe
haven/risk-free security (with PMs picking up the slack), and this is especially pertinent for the long
bond. As such, I went long a 10s30s steepener on Friday, as I expect 2s10s to flatten as housing and
stocks weigh down on the belly’s yields. I’ll be stopping myself out on a close through the triangle
resistance line, but would likely shift to outright short 30yrs rather than closing the steepener if
that indeed occurs.

On the stock front, I re-entered long vol on Friday and went short some index ETFs to get some
bear exposure ahead of the 1300 level I’ve been watching. At the same time, regional banks are
looking quite bullish technically and with their high short interest, I was persuaded to go long some
on some very bullish looking breakouts on Friday. The Intel earnings also drove up the
semiconductors, which I highlighted in my last piece, including my recent ERJ long, which was up
almost 10% on Friday. However, headwinds to further equity gains definitely remain, including the
issues in the muni market, which aren’t seeming to go away with the MUB ETF breaking below
December lows on Friday. This led me to shorting some lower-quality names, like V and GME,
ahead of a possible topping in equities. It is still much too early to tell if the 1300 level is sold into,
and even if it is, I won’t be heavily outright bearish unless/until the 1225 breaks down, but after
such a sharp rally, taking gains and getting short some weaker names appears attractive.

January 17, 2011 |4

Earnings season is approaching and I’m expecting some sell-the-news market action, especially in
fins if the 10yr does indeed get a bit and 2s10s flatten some. XLF is approaching April 2010 highs,
just as the VIX drops to April 2010 lows, and with housing making new lows, a muni crisis
seemingly beginning, inflation spiking even in the US (limiting further QE potential), heightened
litigation risk from foreclosure fraud allegations, and bank accounting shenanigans popping back
up in the form of NPL “phantom income,” banks could be set for some declines if the general
market stalls and/or reverses.

January 17, 2011 |5

 Trades
OPEN
Long ACAS | 6.67 | stop 7.55 | +26.09%
Long HIT | 47.35 | stop 44.80 | +15.14%
Long N | 24.00 | stop 23.20 | +18.83%
Long NOG | 22.20 | stop 21.80 | +26.04%
Long SNDK | 42.95 | stop 40.35 | +22.86%
Long CMCSA | 20.15 | stop 19.70 | +12.75%
Long XEC | 81.00 | stop 78.15 | +20.10%
Long FWLT | 28.30 | stop 27.00 | +31.87%
Long GRA | 33.40 | stop 31.00 | +9.58%
Long /CL | 85.00 | stop 82.80 | +7.35%
Long SINA | 63.75 | stop 62.05 | +38.31%
Long IO | 7.03 | stop 6.64 | +18.92%
Long /ZW | 690.00 | stop 675.30 | +12.07%
Long /ZC | 550.00 | stop 541.90 | +17.95%
Long MEE | 49.10 | stop 47.25 | +12.99%
Long ONXX | 33.25 | stop 34.95 | +7.13%
Long MELI | 67.80 | stop 70.75 | +10.91%
Short IVN | 27.90 | stop 29.50 | +7.03%
Short AUD/CAD | 1.0165 | stop 1.0260 | +410 pips
Short SCCO | 48.55 | stop 51.10 | +4.33%
Long USD/JPY | 81.90 | stop 80.95 | +100 pips
Long ZSL | 10.40 | stop 9.55 | +9.90%
Long VMW | 93.80 | stop 89.90 | +3.41%
Long NTAP | 57.80 | stop 55.60 | +2.91%
Long FFIV | 141.10 | stop 136.95 | +2.18%
Long DECK | 79.80 | stop 75.80 | +2.47%
Long ARUN | 24.50 | stop 22.65 | +4.82%
Short SLW | 34.20 | stop 35.75 | +7.31%
Short ANN | 23.05 | stop 24.80 | -3.12%
Short CAKE | 29.45 | stop 30.75 | -3.97%
Long CLF | 83.15 | stop 79.95 | +6.84%
Long /CT | 150.00 | stop 138.50 | -5.71%
Long RDN | 9.30 | stop 8.70 | +2.69%
Long AGU | 90.95 | stop 86.80 | +2.64%
Long SLM | 13.75 | stop 13.15 | +2.85%
Long OIH | 140.65 | stop 135.00 | +4.22%
Long CLR | 62.15 | stop 59.90 | +0.84%
Long DF | 9.80 | stop 9.25 | +1.33%
Long EWZ | 76.56 | stop 74.90 | +1.10%
Short GMCR | 35.15 | stop 36.50 | -0.51%
Long /ZS | 1418.85 | stop 1381.75 | +0.26%
Long CCME | 17.55 | stop 16.70 | +11.85%
Long ADI | 37.90 | stop 36.90 | +1.85%
Long BRCM | 46.00 | stop 44.00 | +2.91%
Long MXIM | 25.02 | stop 24.45 | +3.88%
Long TER | 13.80 | stop 13.25 | +6.52%
Long NVDA | 20.66 | stop 19.00 | +14.18%
Short ACOR | 28.90 | stop 30.60 | +8.58%
Long MOS | 78.65 | stop 74.55 | +5.42%
Long ERJ | 30.10 | stop 28.90 | +9.63%
Long TDY | 45.05 | stop 44.85 | +2.86%
Long ELX | 12.55 | stop 11.50 | +0.64%
Long LUFK | 62.80 | stop 59.90 | -1.89%
Long LULU | 72.90 | stop 68.50 | -1.50%
Short ECH | 73.40 | stop 76.10 | -1.36%
Long TITN | 21.30 | stop 20.45 | +3.15%
Long HBAN | 7.27 | stop 6.95 | -0.28%
Short AUD/NOK | 5.885 | stop 5.915 | +115 pips
Long DANG | 34.80 | stop 33.20 | -2.70%
Long BG | 68.60 | stop 67.55 | +3.34%
Long WFMI | 52.70 | stop 51.20 | +0.63%
Short X | 56.80 | stop 58.20 | +3.75%
CLOSED
Long VSAT | 40.75 | sell 42.85 | +5.15%
Long CIE | 10.85 | stop 13.35 | +23.04%
Long WLT | 104.50 | sell 130.60 | +23.06%
Short CGA | 7.48 | cover 8.05 | -7.62%
Long VXX | 33.00 | sell 31.50 | -4.55%
NEW
Short CREE | 65.45 | stop 66.60
Long /ZN | 120’30 | stop 119’25
Short /ZB | 120’30 | stop 122’25
Long CATY | 17.15 | stop 16.15
Long SNBY | 49.70 | stop 49.00
Long WBS | 21.05 | stop 20.05
Long EPL | 16.10 | stop 15.30
Long MHR | 7.80 | stop 7.20
Long LNG | 7.25 | stop 6.80
Short HTZ | 14.00 | stop 14.60
Short V | 71.00 | stop 73.50
Short GME | 20.45 | stop 21.05
Long HANS | 54.05 | stop 52.15
Short SPY | 129.30 | stop 131.00
Short XRT | 47.00 | stop 47.75
Short FAS | 31.40 | stop 32.50
Long VXX | 31.50 | stop 29.90
January 17, 2011 |6
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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.

January 17, 2011 |7