“What We’ve Got Here is a Failure to Communicate….Some Men You Just Can’t Reach……”

by Dan July 25, 2011 8:14 am • Commentary

Stubbornness in the face of a very certain discipline didn’t end well for “Cool Hand Luke” and will most certainly not end well for our elected officials in their politicking for a deal on the debt ceiling.  In my humble opinion, a deal will most certainly get done, even if just a stop gap to avoid downgrades from the venerable rating agencies……..but as evidenced by the overnight futures session, we could see a little volatility in the meantime. 

There was a lot of political saber-rattling over the weekend on the issue and one thing we have to assume is that both parties don’t want to be perceived as “losers” in this one and at some point very soon there will have to be some compromise.  Business Insider has a nice scrolling ticker of the latest for those interested (here).

It may just be that the unintended consequences (or intended depending who you ask) of the rhetoric by both sides that drives our politicians to act……..S&P500 futures are down 60 bps this am, as Europe is flat on the day, the dollar is down vs most currencies and gold is making all time highs….   We know that markets hate uncertainty and we have a whole heck of a lot of it here leading up to the Aug 2nd deadline.   A “risk off” few days sending the SPX below 1300 could get market participants a little jittery and cause the sort of excitement we saw leading up to Greece’s austerity vote late last month……either way I think this sets up badly for shorts as the general direction of our equity markets, excluding this debt situation is up.

Friday saw some major out-performance from technology fueling the Nasdaq’s almost 1% gain on the day vs the SPX which was essentially unchanged…..single names are continuing to display volatility following earnings, particularly in tech, with some dramatic one day gains on Friday alone…..AMD up 19%, SNDK up 9.5%, WDC up 8.3%, INFA up 7.5%, and CY & PLCM up 6%.

The Tech sector’s performance was at stark contrast to CAT‘s earnings miss and poor stock performance (down 6%).  Most industrial names that have reported their Q2 so far have had solid yoy and sequential results, but CAT cited the dreaded “China Slowdown” which should have you a little concerned…..China is desperately trying to slow the pace of their economy through a series of tightening measures, and if some recent manufacturing data becomes a trend then they may just have done it……the real question will be their ability to orchestrate a soft landing and not cause a serious disruption to the global demand picture.

The Euro has seen a bit of volatility since making a 52 week highs against the dollar in early may and has been making what appears to me to be an interesting channel lower consisting of lower highs and lower lows.  The break below the 1.40 level a couple weeks back was technically fairly significant and I want to play for a similar move with the currency back to the top end of that channel and the potential for a U.S. debt deal to once again cause investors focus on how crappy things are in Europe and potentially cause a flight to quality in the Dollar.

[caption id="attachment_3410" align="aligncenter" width="300" caption="1 Yr Euro vs U.S. Dollar chart provided by Bloomberg L.P."][/caption]

Check back later for a way to express this view in the FXE.  I will also take a closer look at some tech names to report his week, AMZN, BRCM and JNPR.