Hey -- let's be careful out there.
-- Sergeant Phil Esterhaus (Michael Conrad) in a scene from
Hill Street Blues
Short does not necessarily mean stifled.
Last week's three and a half days of open trading did not lessen
the volatility I've been discussing for two months. I recently said
that less can be more with regards to volume and erraticism in the
market. Quite a bit of headline sensationalism has been driving the
tape of late, and there's much to discuss. However, today's piece
will focus on two countries of primary concern: Portugal and Egypt.
It has been some time since the discussion of the PIGS nations has
been center stage, but recent developments have brought the "P" to
the front once again. With Italy, Greece, and Spain merely a faint
memory - how quickly we forget - Portugal is back in the limelight.
Back in May of 2011 the countries received a "conditional bailout"
package from the EU for more than €78B ($120 billion). The
"condition" was they would implement austerity measures: cut
spending on health care and pensions, increase the retirement age
to 66 (from 65), and increase the work week of public workers by
one hour. Needless to say this did not instill confidence in the
With political pressure mounting and the resignations of Finance
Minister Vitor Gaspar last Monday and Foreign Minister Paulo Portas
on Tuesday, the heat is now on Prime Minster Pedto Passos Coelho.
The events of last week pushed Portugal's 10-year rates above 8%,
furthering their debt challenges. Portugal may not be the largest
country in the EU nor the most prominent, but it only takes one
thorn to take down a lion. A non-resolve could reignite the
smoldering kindle in the EU. This is not good for anyone.
To add insult to injury, there remains Egypt to contend with. As
the US stays politically at bay from the turmoil in that country,
there remain ripples that are beginning to effect global markets.
Black gold is the primary disruption catalyst as uncertainties rise
over the Suez Canal's control. Even as the ports continue to
operate normally, insecurity lingers within the crude markets.
Last week crude oil prices spiked above $100 bbl for the first time
in over a year. Some of the move may be attributed to the thought
of improving economic conditions domestically as Friday's jobs
report came in better than expected. Yet investors cannot ignore
the economic implications on oil transit through the canal.
Click to enlarge
It's almost hard to believe $147 bbl was exactly five years ago
(7/11/2008). Since the Great Recession of 2008 and subsequent
bounce, oil has been consolidating for just over two and a half
years in a massive wedge. These technical formations are indicative
of colossal indecision with no apparent direction. Resolution,
either up or down, typically stems from a catalyst pushing it out
of the "base" formation. It is not my place to decipher the
catalyst, bur rather to capitalize on the opportunity when it
As the wedge forms, the prices become tighter and tighter, akin to
winding a spring. Once resolved, a tremendous risk/reward
opportunity arises since the technical probability of higher prices
increases dramatically and the bottom of the wedge remains as
support. My firm depends on Fusion Analysis (the unification of
Fundamental, Technical, Behavioral, and Quantitative Analysis) to
ascertain opportunities for our investors, and this is an area in
which we see opportunity. There are many ways to play this trade
and numerous investment choices one can make. If the technicals are
correct, and the price is free from resistance, the effect could
last as long as the prior base -- two and a half years. With that
said, there is no need to rush because of all the hype and
sensationalism. Take your time in ascertaining the right investment
choice for you, and as Sergeant Phil Esterhaus says, be careful out
I hope this helps and finds you well.
Editor's Note: Read more at
Tesseract Asset Management