Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Weak US jobs data results in inflation-trade positioning

naufalsanaullah@gmail.com
www.shadowcapitalism.com
while news from Merkel & Bernanke spur action in
respective currencies
November US nonfarm payrolls missed big, with a +39k print vs +150k expected and even higher
whisper numbers, sending the unemployment rate to 9.8%, above the 9.6% consensus estimates.
Private payrolls only ticked up 50k in November, well below the +160k change expected, with
weakness in average hourly earnings rounding up the poor jobs data. US stocks & USD sold off in
tandem on the news, while Tsys were bid; however, bonds and equities reversed sharply from
there, while the USD remained depressed. The x-factor was gold, up over 2% on Friday, which
again shows signs of trading more as a rates/FX product than a commodity.

Stocks rallied for the third consecutive session on Friday, with the S&P up about a quarter of a
percent, closing near both intraday and 2010 highs around 1225. Equity may pause for a bit at this
level, especially consider the underperformance of recent leaders on Friday, with CMG down about
6% and NFLX (which I went short on Friday) over 4%, and I added a hedge to my equity longs on
Friday. USD strength on more Eurozone concerns may be a risk for equity at these levels, as well,
but US stocks look positioned for a nice December rally if year-to-date highs can be taken out.

EURUSD rallied over two big figs on Friday, as the ECB’s sovereign debt purchases (employed
“energetically,” as per ECB’s Ewald Nowotny) led to further spread tightening from the market as
well. Bullish PMIs from Italy, Germany, and the Eurozone as a whole contributed to the Euro-wide
bullishness as well. However, around NY market session close, a Guardian article hit the wires

December 5, 2010|1
reporting that Germany’s Angela Merkel had threatened to leave the euro in late October, via the
following statement: “If this is the sort of club the euro is becoming, perhaps Germany should
leave.” Her spokesman, Steffan Sibert, refuted the claims of abandoning the EMU, but the more
significant aspect of the Guardian article was that she threatened demanding a suspension of
voting rights for EU members with irresponsibly-managed finances, until she got her way regarding
a permanent debt resolution mechanism involving the potential for private haircuts post-2013.
This agrees with my view on German politics, and if sovereign bond spreads begin widening once
again then I think that although further bond purchases (unsterilized even) are necessary and will
be employed, Germany will not concede willingly and will use the inflationary monetary policy
against the periphery when the time comes. For now, EURUSD is approaching a test of the 1.3440-
1.3450 S/R level, which could provide selling for a cycle peak.

AUDUSD blasted through its 55d today on the back of USD weakness, and unfortunately I forgot to
set a stop-order at a time-weighted close over the 55d so only about half of my position was closed
out. Nevertheless, resistance around parity is the next level to watch, but if that is broken, I’ll be
changing my bias on the Aussie quite a bit. Dow Jones Shanghai Index over 370 would be another
such confirmation of near-term bullishness for AUD, copper, and the like. Be watching China.

December 5, 2010|2
I booked profits on USDJPY as it broke the 8350 level on Friday, and after a big fig selloff it is
finding some support at its 55d. I will be looking for it to base/consolidate here and once the 200d
bounce in US fixed-income seems to be drawing to a close, I will likely get back long USDJPY in size
if the technicals permit it.

As I expected, crude oil has now broke out to new highs and challenging the $90/bbl level. I expect
it to continue rallying into year-end, along with US equity, where the bullish price action has been
in recent weeks. Triple digit oil prices look increasingly likely for next year and we are approaching
the levels again where oil will begin to run counter to risk as the higher prices become a drag on
consumption and aggregate demand rather than representing strong final demand and economic
recovery. With strong oil exports, I like NOK as a trade vs EUR, to pair EURUSD.

Ags also performed well on Friday, with wheat and soybeans showing another day of strong
performances. The global inflation play is on and likely will remain on for next year. Its implications
on global economic recovery & growth have yet to be really discounted however, in my opinion,
and will be one of the big investment themes I trade on going forward.

December 5, 2010|3
I noted in my piece on Thursday that I was getting very bullish on CHF, and the Franc took off for a
220 pip gain on Friday vs USD. Parity remains a strong resistance level in USDCHF and if CEE
remains the dark horse in the Eurozone crisis that I think it is, then CHF has a long way to go,
especially against EUR & HUF. EURCHF in fact declined on Friday, despite EURUSD surging. As I’ve
been noting, a lot of the euro’s recent rally has been more of a bearish USD move than a bullish
EUR one, and if the market doesn’t seem completely satisfied with temporary sterilized ECB
liquidity financing the periphery, then EURUSD will follow EURCHF down as well.

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All in all, it looks like Tuesday’s Irish budget vote is what the market is looking at for now and it
definitely feels like positioning is running price action right now. Large ECB bids for peripheral debt
in an oversold-euro environment and illiquid holiday trading has cut a lot of extreme bearish
positioning out of the picture and this sets up the potential for a sell-on-the-news event on
Tuesday, irrespective of the results of the Irish vote. I believe the budget will be passed, although I
do expect the euro to be lower after than it is right now, and a failure of the budget should send
the euro plunging outright and spreads surging.

Economics were the conditions that set up for this crisis but politics are the catalysts setting the
train in motion. And now that the QE3-driven USD offer has been dispelled as a wee bit
sensationalist at least in the near-term (although I still think the $600b figure is expanded next
year), a bid in USD could be just enough to send Eurozone issues flaring right back up again. Ireland
was only bailed out a week ago tomorrow, after all, and the contagion concerns have been
addressed with nothing but promises of unlimited sterilized liquidity, the same promises that
weren’t enough to curb market concerns in the beginning. This week will show whether the recent
rally in EURUSD was positioning-led or if it represents an actual calming of markets and renewed
willingness to lend to the periphery based on support from the ECB.

December 5, 2010|5
 Trades
OPEN
Long VECO | 39.00 | stop 36.30 | +19.62%
Long ACAS | 6.67 | stop 6.25 | +14.99%
Short EUR/CHF | 1.3725 | stop 1.3490 | +695 pips
Long USD/HUF | 195.45 | stop 192.70 | +125 pips
Short ACOR | 28.00 | stop 28.70 | +5.71%
Short /HG | 4.06 | stop 4.15 | +1.72%
Short AUD/USD | 0.9980 | stop 1.0075 | +120 pips
Long SGD/JPY | 63.60 | stop 62.95 | +5 pips
Long SNE | 33.70 | stop 32.30 | +7.77%
Long HIT | 47.35 | stop 44.80 | +4.63%
Long /NKD | 9768.00 | stop 9686.00 | +3.96%
Long EK | 4.79 | stop 4.30 | -1.25%
Long AMR | 8.22 | stop 7.90 | +1.58%
Long N | 24.00 | stop 23.20 | +12.96%
Long TGA | 14.65 | stop 13.45 | +27.92%
Long NOG | 22.20 | stop 21.80 | +10.10%
Long AAPL | 307.50 | stop 295.35 | +3.23%
Long CSTR | 63.45 | stop 58.15 | +1.21%
Long MAT | 25.25 | stop 24.80 | +3.05%
Long SNDK | 42.95 | stop 40.35 | +12.48%
Long CMCSA | 20.15 | stop 19.70 | +2.78%
Long REGN | 29.25 | stop 28.35 | +2.50%
Long VSAT | 40.75 | stop 39.90 | +4.05%
Long THRX | 21.65 | stop 20.55 | +22.40%
Long XEC | 81.00 | stop 78.15 | +7.20%
Long FWLT | 28.30 | stop 27.00 | +9.93%
Long GRA | 33.40 | stop 31.00 | +3.92%
Long UAL | 28.10 | stop 27.00 | -1.32%
Long VSH | 14.15 | stop 13.30 | +8.76%
Short GBP/USD | 1.5700 | stop 1.5850 | -45 pips
Long CHF/HUF | 208.00 | stop 205.00 | +40 pips
Long NG | 14.05 | stop 13.50 | +6.19%
Long SLW | 34.80 | stop 32.80 | +12.96%
Long CIE | 10.85 | stop 10.10 | +14.75%
Long STT | 43.50 | stop 41.80 | +5.08%
Long PCAR | 54.95 | stop 52.00 | +2.38%
Short FRO | 26.10 | stop 27.00 | +0.19%
Short CCE | 24.00 | stop 25.75 | -6.21%
Long /CL | 85.00 | stop 82.80 | +5.29%
Short /NG | 4.33 | stop 4.55 | -1.85%
Long SINA | 63.75 | stop 62.05 | +8.33%
Long CLW | 80.80 | stop 78.50 | +1.72%
Long IO | 7.03 | stop 6.64 | +8.82%
Long /ZW | 690.00 | stop 675.30 | +15.00%
Long /ZC | 550.00 | stop 541.90 | +3.95%
Long BHP | 82.55 | stop 80.90 | +7.41%
Short GBP/SEK | 10.905 | stop 11.115 | +195 pips
Short CHK | 22.00 | stop 22.70 | -0.73%
Long X | 48.10 | stop 46.40 | +6.13%
Long MEE | 49.10 | stop 47.25 | +2.69%
Long WLT | 104.50 | stop 100.05 | +5.76%
Long BTU | 58.00 | stop 55.00 | +9.10%
Long SVM | 12.35 | stop 11.20 | +10.04%
Long RIMM | 60.50 | stop 57.70 | +3.55%
Long XTXI | 9.35 | stop 8.95 | +1.82%
Long SWC | 19.80 | stop 17.85 | +10.10%
Long PRX | 37.30 | stop 35.50 | -0.80%
Long AIN | 21.80 | stop 20.80 | +5.41%
Short AUD/CHF | 0.9700 | stop 0.9810 | +60 pips
Long CNQ | 40.60 | stop 39.20 | +3.00%
CLOSED
Long USD/JPY | 80.75 | sell 83.55 | +280 pips
Long CAD/JPY | 79.60 | sell 83.15 | +355 pips
Long USD/SGD | 1.3085 | sell 1.3095 | +10 pips
Short ARG | 63.50 | cover 64.70 | -1.89%
Long NZD/USD | 0.7440 | sell 0.7640 | +200 pips
Long PUDA | 13.60 | sell 16.00 | +17.65%
Long AGQ | 130.65 | sell 144.50 | +10.61%
NEW
Short EUR/NOK | 8.050 | stop 8.080
Short NFLX | 191.25 | stop 196.10
Long DRYS | 5.60 | stop 5.35
Long SOHU | 71.50 | stop 67.95
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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 5, 2010|6