Mystery Trader

“We cannot agree to an immediate ceasefire in Lebanon because then we will find ourselves in a few months in a similar situation…The army will expand and deepen its actions against Hezbollah.”– Amir Peretz, Israeli Defence Minister

Ceasefire conditions currently being floated by certain outsiders are designed to fail because certain outsiders do not actually want a ceasefire, despite what they say in public.

The market may soon begin to price in increasing Middle East Risks.

Stock prices gapped higher again, this time on news that Q2 GDP grew at a 2.5% annual rate, slower than the generally expected 3.0%. This news encouraged widespread hopes of a soft landing for the U.S. economy, an earlier end to the Fed’s relentless increases in interest rates, and even a pause at the Fed’s August 8th meeting.

On the other hand, core inflation rose at a 2.9% annual rate–more than the Fed likes and the highest in 12 years. It is not at all clear which worries the Fed more, slowing economy or rising inflation. It will be a tough call.

Also, there appears to be little reason to hope for a any diplomatic breakthrough in the Middle East. So, there remains substantial risk of a widening war and possible disruption of oil supplies.

I am using upside reactions to news as opportunities to SELL!

Stock prices opened sharply higher on news of better than expected earnings reports. DJIA component ExxonMobil rose to a new all-time price high after reporting quarterly profit of $10.36 billion. Think about that the next time you gas up. This is one of the benefits of having your own guys running the government. Does anybody remember that they told us that regime change in Iraq would increase oil supplies?

Despite this stock market pop, Bullish momentum is waning. I am looking for a downside reversal.

U.S. stocks turned upward Wednesday afternoon after news of the latest Federal Reserve’s Beige Book survey of economic conditions around the country. A number of regions reported a decline in the overall rate of growth in their economies, which might be good news, other things being equal. But other things are not equal.

Rising energy costs are adding to inflationary pressures, and it could get worse before it gets better. War in the Middle East creates the possibility of much higher energy costs. And heat waves don’t help.

I don’t think this 3-day rally can last, so I am shorting it.

Before Monday’s open, stock prices are indicated generally higher on news of M&A activity, a few good earnings reports, analyst upgrades, falling oil prices, and hopes for diplomatic efforts to resolve the violent conflict between Israel and Hezbollah.

The news changes day to day, adding to market volatility and risk. Reversals are the rule, rather than the exception. I would not expect a lasting rally. I plan to trade very short term with maximum flexibility, moving in and out of positions quickly and easily with minor shifts in momentum.

Now some say Ben Bernanke’s “dovish” words might have been a misinterpretation.
Israel and Hezbollah are killing hundreds of innocent people with no end in sight. Hatred and killing can lead only to more hatred and killing. There is speculation about possible terrorist acts in other parts of the world by radical sleeper cells sympathetic to Hezbollah.
War in the Middle East creates the possibility of oil supply disruption.
There have a good number of corporate earnings shortfalls resulting in very big downside stock price gaps.
I cannot see any reason why anyone in his right mind would want to hold stocks long over the weekend.

Federal Reserve Chairman, Ben Bernanke, is speaking again to the Senate banking committee today. There is a significant danger that Wednesday’s words were misinterpreted, as they were on a previous occasion. Misinterpretation creates the possibility of a big whipsaw reversal. I am positioning for that.

The media reported that interest rate hikes were ending, but that is doubtful. High and rising prices of oil and commodities plus a tight labor market create rising inflation pressures, which in Ben Bernanke’s own words, “would erode the performance of the real economy and would be costly to reverse. The Federal Reserve must take account of these risks in making its policy decisions.”

The way this will play out is far from certain.

First, the good news.
Israel says it does not plan to target Hezbollah’s sponsors, Iran and Syria. According to CNN, Israel’s UN ambassador said, “This is an operation which is very measured, very local.”
Companies reporting strong earnings comparisons may get some play, but I think strong earnings are old news after years of strong earnings.
Now the bad news.
The CPI core rate (ex-food and energy) rose at a 2.6% annual rate, which is more that the Fed likes. Bonds are under pressure: prices are falling and yields are rising.
Housing Starts fell 5.3%, so the economy is heading down.
Disappointing earnings from YHOO probably will be a drag on tech stocks.
Stagflation is a tough problem, and that looks like the path we are on.
I’m still Bearish, but I know that reversals are possible in such a highly news charged environment. I plan to trade with maximum flexibility in days ahead.

Hundreds are dead already, 500,000 people are displaced, and destruction of assets and resources is large and growing. The media now report that that war could escalate much further, last for weeks or even months, and involve large numbers of ground forces. By evacuating thousands of American citizens from Lebanon, the U.S. is signaling that it expects this war get worse. President Bush actually appears to be cheer leading this war by repeatedly affirming Israel’s right to defend itself and refusing to to do anything to stop it. Hezbollah and Hamas links with Syria and Iran create the possibility of a broadening regional war capable of disrupting oil supplies. Iran threatens to retaliate against any attack on Syria, use oil as a weapon, and block the vital oil supply route at the Strait of Hormuz.

Apart from the massive human toll, all this makes for a very bad witch’s brew of market risk. Normal trading guidelines are suspended. Control your risk exposure. This market can do anything. Good luck.

Stocks may go to much deeper oversold with continuing all out war in the Middle East. Also, our friends in the media tell us that investors are BEGINNING to question the sustainability of double-digit earnings growth. Brilliant!

Lucky for all of humanity that the leader of the free world has wisely given us the key to ending World War III. “See, the irony is what they really need to do is to get Syria to get Hezbollah to stop doing this sh*t and it’s over,” according to US President George W. Bush.

Who is this “they”? What are YOU doing, Sir?