Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Fixed-income extends its selloff while risk is slightly bid and
naufalsanaullah@gmail.com
www.shadowcapitalism.com
Australian employment data beats after-hours
Another big day in rates today as the UST 10yr yield traded as high as 330bps today due to the tax
cuts extension, BAB expiration, and various technical dynamics. Chinese rate hike rumors,
especially with tomorrow’s liquidity-draining 3yr bond auction cancelled (further telegraphing
tightening) and the pushed-up data release schedule, helped to send USD higher today, which
exacerbated the yield surge. However, a weak but tolerable 10yr auction in the afternoon provided
a bid for bonds and helped lift stocks to new 52wk highs.

The S&P rallied a little over a third of a percent today, with fins leading the way, perhaps due to
the curve steepening in 2s10s with the belly underperforming (although I think rising yields will be
creeping up the curve soon and the steepening will only be significant relative to very short-term
rates impragmatic for traditional banking spread profits). Low volumes characterized today and
although it is too early to tell, some sideways basing may be more constructive than a breakout
yet.

EURUSD posted a nice bullish hammer after recapturing rates-driven losses and trading back above
the 1.325 level I’ve been mentioning. The Australian employment data (more on that later) just
sent EURUSD through 1.328, and I think this could precede some short-term strength, maybe to
the tune of a big fig or two. Still, the underlying weakness remains in the Eurozone, and the Irish
FinMin said today that he doesn’t rule out returning to the debt market in 2011, despite the
bailout. The market feels complacent with the temporarily liquidity and total absence of political

December 6, 2010|1
cohesiveness regarding a long-term solution that addresses insolvency and balance sheets rather
than near-term liquidity/confidence concerns. I won’t be getting too bearish on EURUSD unless
and until we break the 1.320 level however, and with yields a bit overextended to the upside, the
only catalyst on the horizon for big euro weakness would be a very USD-bullish China data release
or a news bomb of some sort driving periphery spreads wider.

Also helping EURUSD at the moment is the convergence trade, which I recommended as a trade to
watch for but a bit premature to put on. I think once the market begins discounting the need for a
permanent crisis solution and an expansion from the status quo, spreads will break to all-time
highs, but those highs will be the ones to fade as periphery risks become socialized into core paper,
especially in the event of unsterilized bond purchases. The catalyst will be when the market
requires increasing amounts of ECB bids that eventually become too large to sustainably and easily
sterilize weekly.

AUDUSD with a strong after-hours surge tonight after November showed a 54.6k increase in
employment vs 20.0k expected. This is clearly a very bullish number and the cross was bid heavily.
It may make a run to challenge parity again, but the Chinese inflation/tightening risks looming just
days away may put a damper on things and this rally may prove to be a great one to fade. I will re-
short when the time is right.

December 6, 2010|2
30yr Tsy auction tomorrow should provide some more direction in USD, all amid the backdrop of a
very weak political system in the Eurozone. Juncker even called Germany’s opposition to the
Eurobond “un-European” today. Still, sovereign spreads confirm the market is satisfied with
liquidity fixes, for now, and until technicals confirm the euro is ready to sink further, I will remain
neutral on it in the near-term.

While this may all be risk-on for now with positive US data coming in and very constructive
technicals in equity, it is important to consider the double impact of rising rates (consider the
pervasive mortgage convexity hedging and the mortgage rate spreads action during this govys
selloff) and potentially triple-digit oil prices (and other similar inflationist phenomena, such as in
food & clothing). Coupled with the increasingly likely possibility of an all-out muni crisis in 2011,
and the “second half slowdown” may turn out to be a more apt term for 2011 than 2010.

Apologies for the rather short piece today, as I was quite busy tonight and was unable to delve into
st
too much detail about what was otherwise quite an eventful market session. Tomorrow is my 21
birthday so there won’t be a next piece until Friday night. The regular content/length should
resume then. Hope it isn’t too much trouble.

December 6, 2010|3
 Trades
OPEN
Long VECO | 39.00 | stop 45.70 | +17.82%
Long ACAS | 6.67 | stop 7.55 | +16.19%
Short EUR/CHF | 1.3725 | stop 1.3210 | +640 pips
Long USD/HUF | 195.45 | stop 192.70 | +130 pips
Short ACOR | 28.00 | stop 27.30 | +6.64%
Long SGD/JPY | 63.60 | stop 62.95 | +30 pips
Long SNE | 33.70 | stop 32.30 | +7.89%
Long HIT | 47.35 | stop 44.80 | +6.36%
Long /NKD | 9768.00 | stop 9686.00 | +5.50%
Long N | 24.00 | stop 23.20 | +10.38%
Long NOG | 22.20 | stop 21.80 | +8.11%
Long AAPL | 307.50 | stop 295.35 | +4.39%
Long CSTR | 63.45 | stop 58.15 | +1.62%
Long MAT | 25.25 | stop 24.80 | +1.23%
Long SNDK | 42.95 | stop 40.35 | +11.50%
Long CMCSA | 20.15 | stop 19.70 | +3.18%
Long REGN | 29.25 | stop 28.35 | +2.87%
Long VSAT | 40.75 | stop 39.90 | +5.99%
Long THRX | 21.65 | stop 20.55 | +21.43%
Long XEC | 81.00 | stop 78.15 | +5.41%
Long FWLT | 28.30 | stop 27.00 | +11.84%
Long GRA | 33.40 | stop 31.00 | +4.13%
Long CHF/HUF | 208.00 | stop 205.00 | +30 pips
Long CIE | 10.85 | stop 10.10 | +19.26%
Long STT | 43.50 | stop 41.80 | +6.16%
Long PCAR | 54.95 | stop 52.00 | +1.55%
Short FRO | 26.10 | stop 27.00 | +3.87%
Long /CL | 85.00 | stop 82.80 | +4.76%
Long SINA | 63.75 | stop 62.05 | +12.17%
Long IO | 7.03 | stop 6.64 | +14.79%
Long /ZW | 690.00 | stop 675.30 | +13.99%
Long /ZC | 550.00 | stop 541.90 | +3.82%
Short GBP/SEK | 10.905 | stop 11.115 | +70 pips
Long X | 48.10 | stop 46.40 | +8.19%
Long MEE | 49.10 | stop 47.25 | +2.16%
Long WLT | 104.50 | stop 100.05 | +6.21%
Long BTU | 58.00 | stop 55.00 | +4.64%
Long RIMM | 60.50 | stop 57.70 | +1.44%
Long XTXI | 9.35 | stop 8.95 | -1.93%
Long PRX | 37.30 | stop 35.50 | +2.73%
Long AIN | 21.80 | stop 20.80 | +9.45%
Long CNQ | 40.60 | stop 39.20 | +2.68%
Short EUR/NOK | 8.050 | stop 8.080 | +100 pips
Short NFLX | 191.25 | stop 196.10 | +1.58%
Long DRYS | 5.60 | stop 5.35 | +5.53%
Long SOHU | 71.50 | stop 67.95 | +6.10%
Long VXX | 39.95 | stop 37.50 | -2.25%
Long SPXU | 20.95 | stop 20.50 | +0.29%
Long ZSL | 10.95 | stop 10.15 | +7.58%
Short JKS | 23.10 | stop 25.10 | +8.57%
Long ONXX | 33.25 | stop 32.45 | -0.00%
Short JPM | 39.60 | stop 40.40 | -1.67%
Short ISRG | 267.00 | stop 272.00 | +2.60%
Long USD/JPY | 82.90 | stop 82.25 | +100 pips
Short SCCO | 46.80 | stop 48.10 | +2.29%
CLOSED
Short /HG | 4.06 | cover 4.05 | +0.25%
Short AUD/USD | 0.9980 | cover 0.9820 | +160 pips
Short GBP/USD | 1.5700 | cover 1.5740 | -40 pips
Long NG | 14.05 | sold 15.60 | +11.03%
Short /NG | 4.33 | cover 4.60 | -6.24%
Long CLW | 80.80 | sell 80.75 | -0.00%
Short AUD/CHF | 0.9700 | cover 0.9645 | +55 pips
NEW
Long MSFT | 26.95 | stop 26.40
Short HSY | 46.15 | stop 46.70
Short IVN | 27.90 | stop 29.50
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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.
December 6, 2010|4