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    MARKET EDGES

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It’s earnings season and old school stock picking is winning the battles within the context of a misunderstood macro war. If you “don’t do macro” that can actually be a very good thing at this stage of the 2008 US market cycle. Provided that you are nailing these alpha moves in stocks that is – they have been huge so far. An astute investor that I once worked with said, “there’s earnings season, and then there’s everything else… get the earnings right, then we’ll worry about what to do next.”

Dylan Ratigan and his CNBC “Fast Money” crew won’t be so amped up about their “buy everything Tech” call this morning (see our “Fading Fast Money” call from May 20th). There is very little “edge” in making these rotational “sector” calls, particularly if you are a career news reporter like Ratigan is. Texas Instruments (TXN) and Apple (AAPL) lead pre market decliners this morning after issuing weaker than expected outlooks. I have critical support for the Nasdaq at 2257. If they crack it and close it below that line, look out below. If the S&P 500 breaks 1245 alongside that, I think we’ll see 30 points of expedited selling there. Trading this US market is not for the faint of heart. You have to have sharply calibrated ranges in your trading playbook, and adjust them daily.

On the macro front, what ails global stock markets is inflation. The best way to quell that is for the US Federal Reserve to raise rates and re-flate the US Dollar. Unfortunately, the US Dollar Index is weakening again this morning, trading down at 71.85. Bernanke needs to draw a line in the sand here and be sure to have the US$ hold 71.40. If the aforementioned levels in the Nasdaq and S&P 500 break and the US Dollar can’t hold, this market is going a lot lower.

Shifting to Asia, regardless if you “don’t do macro”, you’re probably in sync with us at this point that Asia has slowed. Now all of the revisionist economists, “strategists”, and historians are formally taking down their growth targets for the region, and we’re looking to identify whether consensus is too bearish. The Asian Economic Development Bank is even cutting its growth outlook this morning. They’re moving to +7.6% aggregate growth for the region in 2008. Of course they have no idea on 2009, so they changed their estimate on the out year to the same number as this. Their forecasting models are reactive, not predictive. Don’t use them.

Asian stock markets continue to have a better tone however. Partly because inflation expectations are well publicized and being addressed by Asian central banks. Partly because growth expectations have dampened alongside country indices losing half their value. India closed up +1.4% again overnight and is attempting to mount a squeeze rally of consequence, with the BSE Sensex Index closing at 14,039. Importantly, both the Shanghai Index in China and India’s market have successfully climbed above my short term momentum indicators. This is a first, and should be highlighted positively.

Europe on the other hand looks worse than any region in the world right now. There is a double edged sword to the US devaluing its currency, and that’s simply that legacy European export business get choked by a Euro priced at 1.60. The FTSE is trading down another -1.5% in London, and looks much worse than the S&P 500 does across my quantitative factors. Meanwhile the cumulative declines across the rest of Europe are significantly worse from the October 2007 highs than they are in the bellwether US Indices. Sweden, for example, is getting smoked this morning, trading down another -2.7%, and is down -32% since October. Spain and Ireland are down big this morning and have lost -32% and -42% of their respective values from the now infamous “its global this time” highs.

Great analysts can beat the market by getting the stocks right. Macro markets are smarter than most analysts however. Gold continues to trade higher this morning, up to $972/oz, reminding me that inflation is still alive and well. Just because inflation is finally consensus, does not mean that it is going away.

KM