Timmothy Posey's  Instablog

This week I'm going to try to stay positioned long (even if only slightly long).

The main reason is the quarterly earnings kick off this coming week, starting with Alcoa on Wednesday, and then the big investment banks report the following week (also coinciding with Option Expiration). A lot of bears I trade with are going into earnings season a little too confident, but I think these multinational companies can report top-line revenue simply because of the weak dollar for Q3. Take a look at the chart of UUP (Long Dollar), and you can see that it spent most of Q3 in a bearish decline:

Also, the banks should be better-than-expected simply because credit indices for Q3 nearly DOUBLED from Q2. If you take a look at CMBS (Commercial Real-Estate Mortgage Backed Securities) you will see that it doubled from June 30th. Nearly the same for Residential MBS and other corporate bonds. All told, these banks can have negative revenue growth but report strong profits from investment gains and trading. I expect the big insurers (MET, PRU, HIG) to be the big winners here. Here is a chart of "AA" rated CMBS:

Thus, I won't get short going into earning season for Q3 next week. We saw 3 months ago how bears got ripped apart last time when earnings were better-than-expected. The "bar" for earnings is still being set pretty low. And remember, while the selloff on last week was fun to ride, the trend is still up. Trade safely.

Full Disclosure: Short SPY October Puts

It has been said again and again that the only way out of debt is to inflate the overall economy in such a way that the consumers who are the possessors of such debt will be able to pay their way out with inflated dollars. That so far has been the Bernanke Playbook since Day 1. Many of my fellow colleagues have been pointing towards coming stagflation, an environment marked by rising prices, most notably consumer input prices in the form of gasoline costs, mortgage rates. The flip side to the stagflation coin is a stagnant economy, once thought impossible with inflation, in the form of rising unemployment, rising government debt, and of course lower GDP output.

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The market is pricing in much more than we originally anticipated in our original post that the 10-yr is starting to look toppy. The first three trading days after our post we saw exactly the action we expect, a major pull back, and then a bounce off of support. That pullback only served as a bull flag and now the action has turned parabolic, and we know how that ends... right?

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