Thoughts from the Desk

Here is an email I just sent to my friend W (a former trading desk colleague who I still bounce ideas off every now and then). Not a particularly deep email or anything, but it may serve to give a flavor of the way I approach directional macro trading:

There seems to be a clear divergence in markets at the moment. On the one hand commodities especially ags are charging higher. JJS is up over 20% mtd. And soybeans are making their 2nd attempt at clearing resistance at 1350; if they break then the next target is around 1550. So that's bullish. On the other hand EM stocks are clearly weak. China, Brazil and India are all down 10% from their peaks in early Nov and the charts all look quite bearish to me (especially China). For whatever reason, commentators here are completely ignoring the EM swoon [1]. But it could be dangerous, especially if oil continues to rally (remember the rule: if oil use is above 6% of GDP, a recession is coming).

I am uncomfortably reminded of Jan 2008. Then too, oil was at 90ish. Then too, India and China had peaked a few weeks / months previously. Then too ags rallied phenomenally for a few more months before crashing. (This fits in well with my existing thesis that soybeans should rally till June 2011). Of course history never repeats itself exactly, but it does rhyme occasionally. At any rate, I am going to be watching very carefully for signs of a correction (possibly a major correction)...

[1] Everyone on TV is happy because US stocks are melting up into year end. My own theory is that people were convinced that QE2 was a "buy-the-rumor-sell-the-fact" trade and so they unwound their positions in Nov, happy to lock in their profits for the year. Without so many longs left in the game the market was free to rally, and so it did.