February 15, 2011

Naufal Sanaullah

naufalsanaullah@gmail.comwww.shadowcapitalism.com

Chinese CPI comes in at whisper figures after cut to foodweighting, while new loans come in at ¥1.2t as WestLB &Portuguese GDP weigh on euro 13F Monday

Good start to the week for risk today, as growths in Chinese exports and muted Chinese CPI helpedbring EM risk back on, as copper hits new highs and Asian bourses rally hard off recent lows. Afterrumors of a 4.9% CPI print due to a cut in the food weighting to the CPI basket, the official figuresdelivered precisely that, leading to cooled rate risk and a nice bid for oversold EM. The ChineseJanuary trade figures are interesting, however, considering although exports beat (37.7% YoY vs22.5% YoY expected), imports surged through expectations at a margin well beyond that (51.0%YoY vs 27.0% YoY expected), leading to a $6.46b trade balance, $4.84b below expectations. Foodimports undoubtedly were a big factor in that. Eurozone and Portugal GDP both miss by 10bpsQoQ (0.1% vs 0.0% and 1.2% vs 1.3%, respectively), leading to a bit of euro weakness that wasextended after WestLB announced failure to reach a restructuring agreement, causing fears of senior bondholder impairment to rise. Meanwhile in the US, Obama continues his reelection modeagenda with a $1.1t deficit cut in his FY 2012 budget proposal.The S&P up another 0.24% today, extending its bounce off of 1300 from yesterday, althoughvolume continues declining. With EM risk back to being bid for now, the short EM/long DM tradecould be in for some unwinds, and with US equity as extended as it is, I added a bit moreprotection in the form of short index ETF exposure to hedge my longs at these levels. Summer2008 highs in the SPY ETF are about 100bps away from current levels.

Shadow Capitalism

Market Commentary by Naufal Sanaullah

February 15, 2011

After a sharp drop in London trading on the WestLB news, EURUSD spent much of the New Yorksession recovering early losses, and bounced smartly off of the important 1.340-1.345 S/R levelthat marks December and January 2010 cycle highs. Look for price action around that zone to bekey for future trend development. With event risk popping back up in the Eurozone and fiscallyhawkish rhetoric from Obama, my bias remains to the downside in this pair, to perhaps a retest of its 200d.Also be watching EURCHF here, as USDCHF is hitting cycle highs and retracing a bit, while EURUSDappears to have some risk of rolling over in the near-term. EURCHF has been retracing off of justbelow the 1.325 pivot that held up as good support last fall before being breached in November.200d and trendline resistance are also within a couple big figs to the upside of current levels. Withperiphery concerns starting to heat up again as Portuguese 10yr yields stay above 700bps, I thinkEURCHF is a terrific short at current levels and presents an attractive risk/reward opportunity.

Below January cycle highs at 1.305, I’ll be adding in size to my short.

February 15, 2011

CAD, one of my top 11 market themes of 2011, has been trading well since yesterday’s bullish

merchandise trade figures, and USDCAD appears poised to break below the 9850 level, whichcould to lead to much more CAD upside. After bouncing sharply off of significant support at 9800,AUDCAD has been more or less stagnant and a break below 98c could send CAD pairs surgingacross the board, as AUDCAD is a widely-watched relative value short play at these levels and inthis market environment. With Canadian equity indices approaching all-time highs, the case forCanada is strong here.

Moving over to US equity, I’m switching gears from yesterday’s bull cases for BSQR (which was up

over 10% today) and MRCY, to a short opportunity I see in Carkmike Cinemas (CKEC). When stocksare extended as they currently are, I like to look for some weak companies that have been holdingup in the strong market but exhibiting significant relative weakness, suggesting a turn in thegeneral market could lead to some strong breakdowns in the stock. Today was an instance of

Bukowski’s NR7, with the range being as small as it was, and as per

Sentiment Trader,NR7 at 52wkhighs with lower volume than the previous two days has led to a decline within a week in eleven of the last twelve occurrences. As such, I ran some scans today and came across CKEC, a movietheater operator catering to small, rural markets. Theaters are obviously not the best industry tobe in, with the digital commoditization of video media due to the likes of Netflix and such, andsales have gone absolutely nowhere in the last two years. With debt/equity ratios through the roof and an expensive 22x multiple for a stock that has seen four sequential quarters of decreased fundsponsorship, the fundamental story looks ripe for shorting. Moving to the technical side of things,the 200d is approaching a cross back below the 55d, while the stock price approaches an undersidetest of both moving averages. October and November both saw failures at the 200d and I expectthe same here, while a stop on a close over the 200d allows for an attractive risk/reward,considering I think this stock is headed back below $5. I love to short stocks during bull cycles thathave underperformed significantly trading sideways/stagnant, after selling off sharply during theprevious bear cycle. This is precisely what the chart shows for CKEC, which fell from $19 to themid-$5s from April highs to June lows, and has traded unimpressively exclusively in single digitssince then. Relative strength vs the S&P broke down earlier this month to new cycle lows, and weare currently retesting th

at breakdown level, making today’s entry point all the better. I’m short

from an average fill of 7.33. No word on what the spike in volume this afternoon was about.