Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Risk plunges while oil, USTs, and JPY surge on safe haven bid
naufalsanaullah@gmail.com
www.shadowcapitalism.com
as the revolution is being televised
Huge day in the market on Friday as the Egyptian protests accelerated into all-out revolution,
calling for the end of the three decade rule of 82-year-old dictator Hosni Mubarak. So far, Mubarak
has maintained his authority over Egypt’s leadership, although he has now appointed a vice
president and introduced an entirely new government. Meanwhile, the US has remained passively
watching things unfold, calling for no more than reform and indirectly affirming the legitimacy of
Hosni’s government which has received billions in funding from the US. However, tensions are
rising as protests are popping up in Libya, Jordan, Syria, and most importantly, Saudi Arabia. Living
conditions are not comparable to Tunisia or Egypt in Saudi Arabia, but one must wonder if we are
currently witnessing a paradigm shift in the Muslim population in the Middle East, away from the
dichotomy of theocracy and dictatorship, and toward democracy. Israel is likely closely watching
developments unfold, especially if more secular and democratic regimes start taking control of
Middle Eastern nations. For now, Egyptian opposition leader Mohammed El-Baradei has gained the
support of the general opposition movement and a transfer of power looks likely, while Saudi
stocks plunged 6% over the weekend while CDS spreads skyrocketed.

The S&P closed down 1.79% on Friday on the back of the protests in Cairo and Alexandria, with
volume almost double average figures, sending the index closing below its 21d for the first time
since November. I have been noting the recent underperformance of beta and the negative
divergence between the Dow and the S&P/Russell, and my prediction of a risk aversion-driven
unwind into USTs & JPY seems to be coming to fruition, for now at least. The S&P 1300 level I have
been stressing as significant resistance seems to be offering serious overhead supply, and with the
index closing at its day’s lows right at the support trendline of its rising channel defining its rally
since late August, my call for a correction to 1225 may be coming to light.

January 31, 2011 |1

The big winner of the day was definitely oil, with fears of continued and/or accelerating Middle
East instability sent the energy commodity shooting up more than 4% on the day, and back into
very technically bullish territory. The issue of the Suez Canal being potentially shut down due to
the instability in Egypt is an unlikely one in my opinion, but the threat of continued protests in
Jeddah and Libya, as well as the implications of this Muslim revolution for democracy on Iran,
which had a semi-revolution attempt just two years ago (and is a huge geopolitical pivot point,
with the Strait of Hormuz seeing 20% of the world’s oil shipments pass daily), are definitely
keeping oil prices afloat. Not to mention, if US foreign policy continues to back the status quo,
potential threats to stable and continued oil exports from the Middle East may shift quickly from
extremist Islamists with little political capital in the international political arena to pro-democracy
revolutionaries with much more secular leanings. The surge in oil prices on Friday was the largest
one-day gain since 2008, in which oil prices surged more than 50% to $150/bbl. I have been calling
for oil to have a breakout year in 2011, and with this strong reversal back above $87.50/bbl on
record volume in ETFs and futures contracts, I think oil looks very constructive and will be heading
toward triple digits this year. The pattern implies a rally to $105/bbl before the next significant
correction.

January 31, 2011 |2

As I have been mentioning in my pieces, I was expecting a top in EURUSD around its 61.8% Fibo
retracement from fall 2010 highs, and after hitting that level at 1.374, it has sold off almost two big
figs and currently sitting at its 50% retracement level. Below 1.357 I think we could see some
downside to 1.34, and that is the level that should dictate trend from here in EURUSD. However, I
am more bearish on EURJPY, due to the JPY bid from risk aversion, and the very bearish outside
candle posted on Friday’s three big figure plunge in the cross.

Meanwhile, the growing stagflation risk in the UK saw more confirmation with a -29 consumer
confidence print on Friday. Cable continues to follow the head & shoulders trajectory I posted last
week around 1.60, and remains an attractive sell above 1.57 in my opinion. But GBPJPY looks much
more bearish, with a two big figure plunge on Friday, and post-crash lows not far below current
levels, I think GBPJPY could see new post-Lehman lows in 2011 or 2012, and help to bring cable
down much further as well. EURGBP may end up being a surprisingly good buy in 2011 and/or
2012, depending on the timing of any future European sovereign dilemmas and any further
negative UK economic data.

January 31, 2011 |3

I went long some gold mining and oil drilling/exploration stocks on Friday, and expect gold to start
rallying again, having hit what I consider a potential significant cycle low. I also went short
emerging markets on Friday, and the EEM and EDZ ETF volume prints from Friday are more than
enough explanation of that trade idea. I continue to be long yen and Treasuries, net-short the
market, but long a select few non-energy names as well. Also, I remain long food/ag commodities,
and rice especially has been on a tear lately.

January 31, 2011 |4

 Trades
OPEN
Long IO | 7.03 | stop 6.64 | +29.59%
Long /ZW | 690.00 | stop 675.30 | +20.29%
Long /ZC | 550.00 | stop 541.90 | +20.00%
Short AUD/CAD | 1.0165 | stop 1.0260 | +245 pips
Short SCCO | 48.55 | stop 51.10 | +8.31%
Short ANN | 23.05 | stop 24.80 | +5.21%
Long /CT | 150.00 | stop 138.50 | +11.33%
Long OIH | 140.65 | stop 135.00 | +6.93%
Short GMCR | 35.15 | stop 36.50 | +3.98%
Long MXIM | 25.02 | stop 24.45 | +3.28%
Short ACOR | 28.90 | stop 30.60 | +24.22%
Long ERJ | 30.10 | stop 28.90 | +8.84%
Long TDY | 45.05 | stop 44.85 | +5.33%
Short ECH | 73.40 | stop 76.10 | +2.90%
Long TITN | 21.30 | stop 20.45 | +11.92%
Short AUD/NOK | 5.885 | stop 5.915 | +115 pips
Short CREE | 65.45 | stop 66.60 | +22.90%
Long WBS | 21.05 | stop 20.05 | +7.22%
Short V | 71.00 | stop 73.50 | +2.17%
Long HANS | 54.05 | stop 52.15 | +2.05%
Short SPY | 129.30 | stop 131.00 | +1.22%
Short XRT | 47.00 | stop 47.75 | +1.55%
Short FAS | 31.40 | stop 32.50 | +6.91%
Short AIG | 53.15 | stop 56.85 | +24.38%
Long /ZR | 14.64 | stop 14.20 | +6.01%
Short AAPL | 348.15 | stop 360.00 | +3.17%
Short AUD/JPY | 82.40 | stop 82.95 | +140 pips
Short NZD/JPY | 63.52 | stop 64.15 | +25 pips
Short USD/JPY | 82.55 | stop 83.55 | +55 pips
Short FCX | 118.55 | stop 122.65 | +10.36%
Long EUR/AUD | 1.3520 | stop 1.3380 | +200 pips
Long CNP | 15.85 | stop 15.60 | +1.13%
Long GGAL | 16.24 | stop 15.45 | -3.45%
Short IPI | 37.03 | stop 38.15 | +2.62%
Long CHF/HUF | 210.00 | stop 207.50 | +40 pips
Short MR | 26.20 | stop 27.40 | +0.69%
Long NE | 37.65 | stop 36.50 | -0.82%
Short AUD/USD | 0.9950 | stop 1.0050 | +30 pips
Long RELL | 12.80 | stop 12.35 | +0.78%
Short GBP/USD | 1.5990 | stop 1.6155 | +140 pips
Long MCP | 44.28 | stop 39.95 | +3.86%
Long REE | 12.50 | stop 11.55 | +3.60%
Long BORN | 13.64 | 12.80 | +2.64%
Short AUD/SGD | 1.2755 | stop 1.2880 | +10 pips
Long CAB | 23.40 | stop 22.75 | +4.49%
Long TSLA | 23.95 | stop 22.05 | -0.25%
Short GBP/CAD | 1.5890 | stop 1.6005 | +30 pips
Short EUR/CHF | 1.2890 | stop 1.3095 | +90 pips
Short EUR/USD | 1.3695 | stop 1.3795 | +100 pips
Long TJX | 48.05 | stop 47.10 | -0.70%
Short ERTS | 15.30 | stop 15.80 | +1.96%
Long /ZN | 120’11 | stop 119’14 | +1’00
Short SNE | 35.05 | stop 35.60 | +0.78%
Short /NKD | 10459 | stop 10710 | +1.81%
Long /CL | 86.30 | stop 83.80 | +4.64%
Long UA | 57.55 | stop 51.55 | +3.82%
CLOSED
Long FWLT | 28.30 | sell 37.85 | +33.75%
Long ZSL | 10.40 | sell 12.25 | +17.79%
Short SLW | 34.20 | cover 30.45 | +13.89%
Long CCME | 17.55 | sell 22.05 | +25.64%
Short ANR | 59.30 | cover 56.95 | +3.96%
Short FRO | 26.70 | stop 25.80 | +3.37%
Long NOC | 69.25 | sell 68.05 | -1.88%
Short RAX | 31.30 | cover 34.95 | -11.66%
NEW
Long MEE | 55.55 | stop 51.00
Long IAG | 19.55 | stop 18.50
Long EDZ | 21.83 | stop 20.20
Long UGL | 61.90 | stop 59.00
Long SLW | 31.40 | stop 28.80
Long ANR | 57.60 | stop 54.10
Short GBP/JPY | 131.05 | stop 132.95
If you would like to subscribe to Shadow Capitalism Daily Market Commentary,
please email me at naufalsanaullah@gmail.com to be added to the mailing list.
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 31, 2011 |5