Morning Musings From Art Cashin

Via UBS Financial Services:

Coloring Within The Lines Marks A Reweighting And Expiration – Friday’s stock market started out dull, then got a touch exciting, and then opted back for dull.

The opening Expiration imbalances were a bit indifferent, or even confusing, leading to a rather blah opening.
Then, at 10:00, stocks turned, better supposedly thanks to some mildly upbeat comments on the newswires. That enthusiasm exhausted within an hour and stocks eased back and droned choppily sideways through the balance of the day.

Even the S&P reweighting and Expiration “on close” orders could not put any excitement into the dull trading. The S&P was so mildly behaved that it never challenged either the napkin support or resistance levels. Yawn!

Some Thoughts On Consequences Of China’s Move – We were going to outline some possibilities that might result from China’s loosening moves. But the savvy TJ Marta beat us to it. So, not to reinvent the wheel, let’s look at TJ’s idea:

Market implications

  1. Downward pressure on US Treasuries - US yields jumped sharply overnight, and the continued upward pressure will help offset the recent downward bias due to slowing growth and benign inflation readings.
  2. US $ lower - As the main reserve currency, US dollar will be viewed as the big loser of a managed yuan appreciation. Losses will likely be mostly against currencies that stand to benefit from increased strength of the yuan: AUD and NZD. The US$ weakness could offset the downward bias in EUR/USD stemming from the Euro Zone sovereign debt crisis.
  3. Commodities higher - a stronger yuan will mean that China can afford to buy more commodities to feed its people and industrial processes.
  4. Stocks - the right ones higher. So far, stocks generally have reacted positively to the news. However, not all stocks will benefit - to the same degree or at all. For example, exporters of goods that China processes for re-export will not likely benefit. However, commodity exporters and companies seeking inroads to China's domestic economy will.

We agree with TJ that China’s move may not be the unalloyed benefit that some pundits are claiming.

Some speculate that China timed the move in front of the G-20 meeting. Without the move, the G-20 could have become a kind of tribunal on the yuan. Any move after it would have been seen as China buckling under pressure. They eliminated that with this pre-emptive strike.

Cocktail Napkin Charting – The bulls may be ready to challenge resistance levels, thanks to China’s loosening of the yuan peg. The napkins see S&P first resistance at 1123/1125 with a fallback at 1130/1134. Support looks like 1110/1112 and then 1104/1106.

Over the last seven years, the week following the June Expiration has seen stocks move lower. Given the look of the pre-opening futures, the bears will have a lot of wood to chop.

Consensus – The yuan move has futures projecting a stock rally of 1% or even 1.5%. The future spike appears to be heavily driven by weakness in the dollar and short covering in the Euro. Stay alert and very nimble.

Trivia Corner

Today’s Question - Fill in the two missing words using the same seven letters (you may re-arrange):
"Solving geometry problems in summer school is so __ __ __ __ __ __ __. They should at least let you do it __ __ __ __ __ __ __."


An Encore Presentation

On this day (-1) in 1756, the Nawab of Bengal decided to make a geo-political statement. He, or his spin doctors, probably thought he needed some "no wimp" visibility. Certainly, at the time, no one considered him a "third world" leader. (Most people didn't know there was more than one world.) And the locals (his loyal subjects) remembered him as a kid who tortured small animals and wiped his nose on his sleeve. They thought the strongest thing in his resume was the line that read: Father - former Nawab of Bengal.

So the sniveling, egocentric, psychopath - er, that's politically incorrect...let me his Royal Highness decided to teach the British East India Company a lesson. He arrested 146 British officers, clerks and functionaries and put them in a small covered pit. Apparently there was trouble with the ozone layer even then, for when they had uncovered the pit only 23 were still alive. The London press dubbed the pit - the Black Hole of Calcutta. Shortly, thereafter, the Nawab was hanged by some bodily appendage. Once again the evil press had done a politician in.

To celebrate take note of the working conditions in your area. But don't complain to the authorities. As a guy once told me in a shipyard bar -"Remember, the only thing worse than having to work here is not being able to!"

It wasn't the Black Hole of Calcutta that bothered traders last week. It was not even the Black Hole of Sovereign Debt that had bothered markets for weeks. Rather it was the hole of boredom that often fills the middle of an Expiration session.