The Calm and The Storm

This note was originally published at 8am on December 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“They sicken of the calm, who know the storm.”

-Dorothy Parker


While it’s tempting for a man with an Arctic Cat Pantera snowmobile parked outside his front door to poke fun at Americans wearing dress shoes in NYC this morning, I’ll just roll with a quote from a self proclaimed “wisecracker” poet from New Jersey. Dottie Parker was a beauty.


Whether you are observing global financial markets from the Big Lake they call Gitche Gumee this morning or from a window on Madison Avenue, you’ll find that plenty has changed in the last 72 hours:

  1. China raised interest rates.
  2. American shoppers have been grounded on the East Coast.
  3. Canada beat Russia 6-3 at the World Junior Hockey Championships in Buffalo.

Now, some things, like Canadian demand for gold on ice, are expected. Other things, like China funding deficit-financed American hopes for a continued stock market rally, aren’t…


In fact, China’s Premier, Wen Jiabao, made an important statement to China’s citizenry on Christmas Day that “inflation expectations are far more dire than inflation itself.” FDR-esque.


When it comes to the global inflation on your screens this morning, China’s leadership using the word “dire” wasn’t misrepresented. If you don’t want to use the all-time high price for something like copper (up another +2.4% last week to $4.24/lb) as a leading indicator for inflation, just use the price moves in the CRB Commodities basket (19 different commodities) and look at what they’ve done across the following 3 durations:

  1. Weekly = +2.8% week-over-week (last week)
  2. Monthly = +6.5% for the month-to-date (December)
  3. Quarterly = +15.5% for the quarter-to-date (Q410)

The word “expectations” wasn’t misused either. As Shakespeare said, “expectations are the root of all heartache” and I have no reason to believe that the last price of a commodity that represents a large part of a human being’s buying power isn’t the same.


Whether it’s the price to warm your home in Connecticut (oil $91.34/barrel this morning is trading at a 26-month high) or the price to feed your family in Asia this morning, the Chinese aren’t sitting on their hands while the US Federal Reserve opts to Quantitatively Guess (QG) about how this all ends.


While He Who Sees No Inflation (Bernanke) does his best to extend and pretend the Fiat Fool experiment, the calm (US stock market investor complacency) that’s come before every emerging market storm (inflation) is finally rearing its ugly head.


Before you get a bull to try to tell me that this storm is actually great for US “growth” let’s look at what effect the force majeure of China tightening interest rates has had on the Shanghai Composite Index:

  1. Down -1.9% overnight to 2,781
  2. Down for 7 out of the last 8 trading sessions
  3. Down -15.1% for 2010 to-date

Again, if you’re one of the bulls that’s in the US “growth” is back camp and you’re willing to tell me that Chinese growth slowing as inflation accelerates plays no part in your global risk management model, I don’t know what to say in response other than good luck in the New Year with that…


In US equity market action, the low-volume and low-volatility calm may very well be a reality for revisionist stock market historians, but the break-downs in US Treasury and emerging debt markets look eerily similar all of a sudden. They look like they are both staring into the same storm of global inflation.


In the eye of the NYC storm this morning, UST yields continue to breakout to the upside with 2-year and 10-year yields hitting 0.67% and 3.44%, respectively. If the bulls want to tell me higher-highs in yields are “growth” signals this morning, I’ll just call that out for what it is – a smoke signal that The Calm and The Storm of Wall Street story-telling remains.


My immediate term TRADE lines of support and resistance for the SP500 are now 1246 and 1262, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Calm and The Storm - BlizELL

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