Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah
naufalsanaullah@gmail.com Philly  Fed  and  housing  price  misses  fail  to  derail  holiday-­‐
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shortened  rally  ahead  of  Easter  weekend  
 
A   macro-­‐data   intensive   Thursday   ahead   of   the   Good   Friday   holiday   showed   mixed   data,   but   the  
results  fail  to  put  the  brakes  on  the  continued  rally  in  risk.  US  initial  jobless  claims  broke  the  400k  
mark  once  again,  clocking  in  at  403k  vs  390k  expected,  followed  by  April’s  Philly  Fed  falling  down  
to  18.5  vs  36.8  consensus  vs  43.4  prior.  US  February  housing  price  data  also  showed  a  drop,  with  a  
1.6%  decline  MoM  vs  expectations  of  a  muted  0.3%  fall.  On  the  other  side  of  the  pond,  German  
IFO  saw  a  beat  in  current  assessment  (116.3  vs  115.5  consensus),  but  a  small  miss  in  expectations  
(104.7  vs  105.5  consensus)  due  to  rising  periphery  concerns.  UK  retail  sales  also  beat,  showing  a  
0.2%  MoM  growth  in  March  against  expectations  of  a  0.5%  decline.    

The   S&P   rallied   0.53%   on   Thursday,   closing   near   its   HOD   and   approaching   a   breakout   into   fresh   52  
week   highs,   as   the   inverse   head   &   shoulders   pattern   I’ve   been   posting   in   recent   pieces   looks  
poised   to   resolve   successfully   to   the   upside.   This   is   definitely   a   bullish   development   and   the  
pattern   suggests   another   100   points   in   the   S&P   is   imminent.   Earnings   are   coming   up   for   the  
majority   of   American   firms,   so   there   are   plenty   of   catalysts   for   the   market   to   move   either   way.  
Margin   compression   will   definitely   be   the   name   of   the   game   as   investors   watch   for   inflation’s  
impact  on  corporate  results.  

EURUSD   has   been   trading   sideways   in   the   last   couple   sessions,   as   a   weakening   dollar   helps   to  
mitigate  euro-­‐related  concerns  that  are  hurting  other  euro  crosses.  Periphery  spreads  continue  to  
widen,  and  Spanish  yields  are  testing  highs  on  a  number  of  tenors.  Spanish  10yr  paper  yielding  6%    

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 will  not  be  a  good  sign  going  forward  for  the  Eurozone,  and  whether  Portugal’s  issues  (which  led  it  
to   seek   a   bailout)   will   lead   to   contagion   effects   in   Spain   is   going   to   be   a   vital   issue.   I   am   turning  
more   bearish   on   the   euro   once   again,   against   only   strong   risk   crosses   for   now   (I   especially   like  
EURSGD   short   here),   but   remain   long   EURUSD   because   of   more   USD-­‐specific   factors.   Below   are  
10yr  Spanish  spreads  to  Bunds  (courtesy  of  Goldman  Sachs’s  John  Noyce)  and  the  EURUSD.  

USDJPY  has  taken  a  beating  in  recent  weeks,  as  an  expected  correction  from  the  massive  post-­‐BoJ  
surge  turned  into  a  sharper  selloff  due  to  USD  weakening  across  the  board.  The  cross  now  sits  at    

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 significant  support  around  81.50,  however,  which  also  marked  late  February  lows.  Risk  definitely  
looks   back   on,   with   the   S&P   sitting   right   at   highs,   and   that   should   continue   to   weigh   on   JPY.   A  
falling  yen  could  steer  the  Nikkei  back  higher  as  exporters  regain  a  bit  of  trade  advantage,  but  the  
bigger  issue  is  the  massive  Japanese  debt  burden.  And  with  Japan’s  public  pension  fund  liquidating  
JGB   holdings   to   finance   payments,   there   may   be   more   reasons   to   be   selling   JGBs   than   buying   at  
this  point.  I  am  expecting  a  rise  in  inflation  in  Japan,  which  is  counter  to  most  analysts’  opinions,  
and   a   new   bear   market   in   Japanese   government   debt   within   to   begin   within   the   next   twelve  
months.  In  FX  space  (and  in  the  more  near  term),  however,  NZDJPY,  CADJPY,  and  CHFJPY  all  look  
like  great  buys  at  current  levels.  

As   oil   prices   rise,   natural   gas   continues   looking   increasingly   bullish.   China   is   the   second   largest  
energy   consumer,   after   the   United   States,   and   is   distancing   itself   from   nuclear   power   after   Japan’s  
catastrophe,  while  having  to  deal  with  increasing  geopolitical  catalysts  for  higher  oil  prices.  Natural  
gas  is  the  obvious  alternative.  The  chart  is  also  bullish  with  the  large  triangle  looking  to  resolve  into  

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 a  breakout  that  would  carry  natgas  prices  to  $6/MMBtu  in  the  near-­‐term  and  $8.50-­‐9.00/MMBtu  
over   the   next   several   months.   Natural   gas   equity   plays   are   already   on   the   move   and   have   been  
since  Jackson  Hole  last  summer.  

Silver   prices   are   up   dramatically   in   the   last   few   months,   having   rallied   more   than   60%   YTD.   The  
chart   looks   very   unsustainable,   and   the   lack   of   participation   from   gold,   palladium,   or   precious  
metals   equity   plays   (including   silver   miners)   adds   credence   to   that   thesis.   Contributor   Jonathan  
Sheets  adds  some  great  color:  

It   should   be   noted   that   the   fundamentals   (or   lack   thereof)   of   the   silver   surge   from   Feb-­‐
mid   March   was   the   speculation   on   that   Comex   would   default   on   the   larger   position   of  
open  interests.  Just  like  in  mid-­‐November  to  early  Dec.  Now  the  commodities  traders  are  
picking  up  the  pattern  and  with  May  being  a  delivery  month,  and  more  rumors  of  silver  
shortages,  the  earlier  this  run  up  has  started  and  the  more  fierce.  

Given   the   silver-­‐specific   nature   of   this   massive   parabolic   run,   it   appears   Sheets   may   be   on   to  
something.  May  COMEX  delivery  is  less  than  a  week  away,  and  with  silver  barely  below  $50/oz,  the  
time   to   top-­‐call   may   be   fast   approaching.   In   the   meantime,   silver   prices   are   up   another   6.5%  
overnight  as  I  write  this.    

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 Moving   onto   equity,   coal   stocks   look   terrific   here,   with   PCX   and   WLT   seeing   some   nice   upside  
volume   coming   in.   Both   look   poised   to   break   out   of   their   constructive   base   patterns   and   onto   new  
highs.  

   

Semiconductor  manufacturer  Novellus  Systems  is  showing  a  bullish  bounce  off  its  155d  and  looks  
poised   to   restart   its   uptrend.   It   is   notable   that   Ray   Dalio’s   Bridgewater   Associates   (which   had   an  
absolutely  monster  year  in  2010)  owns  25  million  shares  of  NVLS.  

Pharmas   are   looking   bullish   again,   and   EXEL   is   showing   promise   as   it   completes   a   very   tight   six  
week  base  and  bounces  off  its  55d.  This  is  definitely  one  of  the  more  bullish  charts  around  and  I  
would   not   be   surprised   to   see   this   stock   double   from   current   levels   in   the   next   few   months,  
especially  if  earnings  on  May  3  beat  estimates.  

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Rounding  things  off  are  three  tech  stocks  whose  charts  I  will  let  do  the  talking:  

     

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Tomorrow  brings:  

• March  US  new  home  sales  (10:00am:  +12.0%  consensus  vs  -­‐16.9%  prior  –  MoM)  
• April  Dallas  Fed  (10:30am:  13.4  consensus  vs  11.5  prior)    

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   Trades  &  Positions  

Open   Long/Short   Ticker   Entry   Stop   Performance  

L   /ZC   550.00   541.90   +36.91%  
L   OIH   150.00   138.50   +7.82%  
L   TITN   21.30   20.45   +46.75%  
L   NE   37.65   36.50   +14.15%  
L   /CL   86.30   83.80   +30.41%  
L   UA   57.55   51.55   +36.32%  
L   MEE   55.55   51.00   +19.01%  
L   CRR   114.33   105.00   +21.51%  
L   SOHU   80.04   73.00   +19.41%  
L   SINA   87.55   72.60   +51.98%  
L   BIDU   118.30   109.30   +26.21%  
L   AMRN   8.85   6.75   +91.19%  
L   DECK   79.92   76.90   +20.21%  
L   LULU   75.15   71.45   +35.95%  
L   CMG   240.67   232.40   +15.22%  
L   DNR   21.60   20.10   +5.83%  
L   PCLN   440.72   409.10   +23.37%  
L   WLL   63.02   60.00   +14.82%  
L   MRCY   18.70   17.75   +12.60%  
L   PRGO   72.76   71.20   +22.32%  
L   CHK   30.65   28.50   +6.59%  
L   CTXS   69.61   65.05   +9.71%  
S   SCCO   41.25   42.65   +10.39%  
L   USD/JPY   78.85   77.70   +335  pips  
L   EUR/JPY   116.60   114.90   +340  pips  
L   CAD/JPY   81.30   79.70   +510  pips  
L   SGD/JPY   62.55   60.10   +400  pips  
L   EUR/USD   1.4230   1.4085   +335  pips  
L   RAX   35.55   33.45   +25.54%  
L   TSLA   26.15   21.70   +2.29%  
L   NFLX   220.40   202.15   +14.55%  
L   SD   10.35   9.15   +21.48%  
L   SHS   44.95   40.45   +29.30%  
L   EQIX   85.70   82.10   +8.78%  
L   VHC   21.12   18.65   +19.12%  
L   MSFT   26.05   24.60   –2.22%  
L   MO   25.90   25.30   +0.57%  
L   NZD/JPY   66.10   64.00   –30  pips  
L   WES   34.95   32.90   +2.22%  
L   SGMO   7.59   6.90   +1.98%  
L   N   29.04   26.75   +2.77%  
L   AMZN   178.38   169.90   +4.18%  
L   POT   55.38   50.20   +4.53%  
L   DHX   16.91   14.95   +4.97%  

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   Trades  &  Positions  (cont’d)  

Open   Long/Short   Ticker   Entry   Stop   Performance  

L   LLNW   7.22   6.45   –3.92%  
L   EMC   26.44   25.25   +7.60%  
  S   GS   154.05   158.50   +0.38%  
L   KOG   7.05   5.65   +2.63%  
  L   CRM   131.91   115.60   +6.11%  
S   EJ   12.00   13.60   –4.75%  
L   QLIK   27.93   25.25   +7.08%  
  S   DAL   9.27   10.30   +2.36%  
S   UYG   66.63   74.00   –2.43%  
  S   FXI   45.40   47.05   –1.30%  
S   SCHN   58.36   61.05   –4.95%  
L   IMAX   30.10   28.55   +6.72%  
  L   MRCY   19.95   17.20   +4.61%  
L   GOOG   521.10   499.90   +1.59%  
  L   EUR/CHF   1.2820   1.2720   +80  pips  
  S   USD/CAD   0.9655   0.9715   +135  pips  
L   TBT   36.35   34.95   +0.89%  
  L   FFIV   98.83   89.85   +8.14%  
  L   JKS   24.00   19.60   +3.08%  
L   DNDN   41.20   39.15   –0.75%  
  L   JDSU   18.96   17.55   +5.49%  
  L   RHT   47.70   43.80   –0.23%  
L   GLNG   30.10   25.00   +0.66%  
  L   VRTX   48.05   45.65   +2.75%  
L   BORN   9.35   8.45   –2.99%  
   
Closed   Long/Short   Ticker   Entry   Stop   Performance  
S   AUD/CAD   1.0135   1.0260   –125  pips  
           
         

   

New   Long/Short   Ticker   Entry   Stop   Performance  

L   APKT   78.70   67.20    
L   BSFT   45.90   43.80    
L   NTAP   50.40   48.75    
L   PCX   26.05   23.05    
L   WLT   132.85   125.80    
L   XOM   86.25   81.80    
S   EUR/SGD   1.7995   1.8150    
L   EXEL   11.70   10.60    
L   NVLS   35.15   33.00    
S   /SI   48.80   51.50    
 

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DISCLAIMER:   Nothing   contained   anywhere   on   this   site   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.  

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