Shadow Capitalism

Market Commentary by Naufal Sanaullah

Naufal Sanaullah Afternoon block-sell rounds out market action in quiet

naufalsanaullah@gmail.com
www.shadowcapitalism.com
trading session ahead of periphery auctions
Today’s slow day in dataflow found matching silence in the markets, as traders look ahead to
Portuguese and Spanish auction tomorrow and Thursday, respectively. Portugal’s PM José Sócrates
made some headlines today, claiming that “the [2010] budget deficit will clearly be below
forecast,” adding that spending rose 80bps less than projected and revenues grew 80bps more
than projected in 2010. The comments are ahead of tomorrow’s €750m-€1.5b auction, against the
backdrop of a 10yr yield still hovering around 700bps. In other news, a day after McKibben’s $13b
estimate of potential damage due to the Australian floods, forced evacuation authority is being
weighed by officials in Brisbane and peak water levels are expected to remain for over a week.
Finally, the $32b 3yr UST auction today was well-received, with a sharp rally in US fixed-income
with curve flattening as the long-end outperformed.

The S&P gained 0.35% today as a gap-up leads to a quiet but volatile session, closing near open for
a doji candle. It remains in its 20 point consolidation pattern between 1260 & 1280 that it has been
building since the new year. The market continues to look constructive, particularly in the tech and
energy sectors, which I think are poised for great years in 2011.

January 11, 2011|1

EURUSD posted another bounce today of about 20 pips, as the recent four big figure plunge is
being consolidated ahead of this week’s periphery auctions. If the 1.29 handle holds convincingly,
perhaps if Portugal’s auction goes smoothly tomorrow, the 1.31 area will be important to watch
for in terms of resistance. As I mentioned last night, below 1.29 EURUSD should be headed much
lower, particularly after the very sharp failure at its 55d to start the new year. EURCHF is
approaching the top of its consolidation range, less than a big fig away from the 1.275 area I’m
watching, although a break above that could lead to a stronger rally. My longer-term outlook on
the Eurozone remains, however, as I continue to view unsterilized QE-esque sovereign bond
purchases as the only feasible option in the long run for the ECB to prevent all-out contagion.
Because of this, I also like periphery equity (particularly the Spanish IBEX and its components) and
fixed-income long funded in DAX, bunds, and euro shorts.

USDCAD posted another selloff today, as CAD is now compellingly through parity, as I’ve been
expecting. I’m very bullish on CAD and Canada’s economy & resource sector, as I expect oil to have
a terrific 2011 from a recalibrated supply chain, boosted by expansionary central bank liquidity
making its inflationary rounds and increased geopolitical concerns in Pakistan’s FATA & the Korean
peninsula. CAD looks solid against almost every currency cross, particularly in CADJPY right now,
with a potential ascending triangle/cup-and-handle breakout in the works.

January 11, 2011|2

Another euro cross I’ve been watching is EURNOK, which I am still very bearish on in the longer
term. However, significant support is at hand after an almost straight-line 500 pip plunge in the
last several weeks. With my book already heavily net-short euros and the potential for upside
surprises from this week’s periphery auctions (which I regard as non-events in the meantime, on
both bearish and bullish surprises), a long EURNOK punt is an attractive risk/reward to balance out
my holdings a bit, perhaps good for a couple big figs if my idea works out. Similar scenario in
EURPLN. I’m covering a bit of my EURNOK short, but still holding, while going net-long EURPLN.

January 11, 2011|3

Deflationary conditions in Japan continue to persist, with M2 rising only 2.3% in December, the
slowest YoY rise in money stock since March 2009. However, as US yields remain elevated and
poised for more gains if the BAB expiration wreaks the havoc in the muni market that I expect,
USDJPY should continue to catch a bid, and through 84.50 it should be poised for a continued rally.
I continue to expect 2011 to mark the beginning of Japan’s fiscal crisis, with JPY selloffs initially
being met with long-awaited welcome, until JGBs start going with it. A lot remains to be seen,
however, and I do not want to run the risk of being premature in my views and trades. Still, I like
USDJPY on a technical basis and continue to remain long in size. I also continue to like Japanese
exporters on this shift in JPY, with Sony looking particularly bullish with a nice two-month base
forming and approaching breakout.

January 11, 2011|4

The last couple charts I am posting today are of leading energy stocks I am long. As I mentioned, I
am very bullish crude oil, and with the US stock market looking as constructive and bullishly coiled
as it is, energy stocks are a great proxy for my macro thesis, at least presently. Below are the charts
for NOG, XEC, and CIE, all of which have performed very well for me since purchasing them.

January 11, 2011|5

Tomorrow brings debt auctions from Portugal & the US, Eurozone IP, UK trade balance, Fed Beige
Book, and Australian unemployment. On a positive note, referendum voting is underway in
Southern Sudan and the recently booming economy in capital Juba could be setting up for more
energy infrastructure to afford Southern Sudan control over its oil, particularly considering recent
Japanese financing for an oil pipeline extending south-east to Kenya for refinement and exporting.

January 11, 2011|6

 Trades
OPEN
Long ACAS | 6.67 | stop 7.55 | +22.04%
Short EUR/CHF | 1.3725 | stop 1.3210 | +1075 pips
Long USD/HUF | 195.45 | stop 192.70 | +185 pips
Long SGD/JPY | 63.60 | stop 62.95 | +70 pips
Long SNE | 33.70 | stop 32.30 | +7.89%
Long HIT | 47.35 | stop 44.80 | +16.33%
Long /NKD | 9768.00 | stop 9686.00 | +7.96%
Long N | 24.00 | stop 23.20 | +18.63%
Long NOG | 22.20 | stop 21.80 | +26.08%
Long SNDK | 42.95 | stop 40.35 | +21.54%
Long CMCSA | 20.15 | stop 19.70 | +12.16%
Long REGN | 29.25 | stop 28.35 | +13.33%
Long VSAT | 40.75 | stop 39.90 | +9.80%
Long XEC | 81.00 | stop 78.15 | +14.73%
Long FWLT | 28.30 | stop 27.00 | +26.18%
Long GRA | 33.40 | stop 31.00 | +8.17%
Long CHF/HUF | 208.00 | stop 205.00 | +115 pips
Long CIE | 10.85 | stop 10.10 | +25.71%
Long /CL | 85.00 | stop 82.80 | +7.34%
Long SINA | 63.75 | stop 62.05 | +29.84%
Long IO | 7.03 | stop 6.64 | +18.35%
Long /ZW | 690.00 | stop 675.30 | +10.33%
Long /ZC | 550.00 | stop 541.90 | +10.27%
Long MEE | 49.10 | stop 47.25 | +17.13%
Long WLT | 104.50 | stop 100.05 | +32.61%
Long AAPL | 307.50 | sell 343.00 | +11.54%
NEW
Short ANN | 23.05 | stop 24.80
Short CAKE | 29.45 | stop 30.75
Long CLF | 83.15 | stop 79.95
Long LVS | 50.50 | stop 47.30
Long /CT | 150.00 | stop 138.50
Long RDN | 9.30 | stop 8.70
Long AGU | 90.95 | stop 86.80
Long SLM | 13.75 | stop 13.15
Long OIH | 140.65 | stop 135.00
Long CLR | 62.15 | stop 59.90
Long DF | 9.80 | stop 9.25
Long EWZ | 76.56 | stop 74.90
Short GMCR | 35.15 | stop 36.50
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DISCLAIMER: Nothing contained anywhere in this commentary, including
analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
securities.

Short EUR/NOK | 8.050 | stop 8.080 | +330 pips

Long ONXX | 33.25 | stop 32.45 | +7.73%
Long MELI | 67.80 | stop 63.80 | +9.44%
Short IVN | 27.90 | stop 29.50 | +12.69%
Short EUR/USD | 1.3365 | stop 1.3445 | +375 pips
Short AUD/CAD | 1.0165 | stop 1.0260 | +425 pips
Short EUR/CAD | 1.3670 | stop 1.3290 | +840 pips
Short AUD/USD | 1.0015 | stop 1.0105 | +150 pips
Short SCCO | 48.55 | stop 51.10 | +3.92%
Long USD/JPY | 81.90 | stop 80.95 | +120 pips
Long ZSL | 10.40 | stop 9.55 | +2.10%
Long TBT | 37.90 | stop 36.00 | +1.18%
Long VMW | 93.80 | stop 89.90 | +2.01%
Long NTAP | 57.80 | stop 55.60 | +0.83%
Long FFIV | 141.10 | stop 136.95 | +1.10%
Long DECK | 79.80 | stop 75.80 | -0.93%
Long ARUN | 24.50 | stop 22.65 | +1.84%
Short SLW | 34.20 | stop 35.75 | -2.66%

CLOSED
January 11, 2011|7