Day One of the Tiger

Tues Feb 16, 2010
When things work out in the direction of a plan, it doesn't mean that the wait wasn't just as hard, just that the relief is a bit more heady. After the nearly worldwide long weekend, the Year of the Tiger has begun. Right on cue, talking heads are reviving the reflation trade. JIN returned to its all-time high in good time for the return of the Chinese political elite back to work on Mon Feb 22 upcoming. I would expect some positively-slanted news.

Also on the news front, I had already noticed that at least 2 months had gone by without a word from Vermilion (VET.UN). The stock had been flat and I had been very anxious to reverse my pairs trade and reinstate the somewhat larger VET position the trade paid for, before something broke and the stock ran away. I got the execution. Today VET reported very positive drilling results in Holland (4 succesful mainland wells from 4 spuds). Added revenues are expected very fast - by Q2 2010 and a decent production life. The stock moved up with some conviction. I would think there will be positive talk on the new gas field off the coast of Ireland soon. If so, an increase in the monthly tax-free distribution to shareholders would make sense, perhaps as early as Q3 this year. Even so, at $34 the stock is far below the $50 level it reached before the 2008 market break.

A lot of people are very nervous today that the market has not yet collapsed as expected, so they sold into the very strong buying today. I think many of these are likely the same people that did not buy into the 2009 massive upward until very late in the game and most of the benefit was over. BUT, it is very easy to be complacent as soon as things go well. A concern, but getting frightened on Day 1 seems a bit too weak-kneed. So I recalculated where I should sell, first on a 2-week to 2-month change scenario, then also on a 3-month to 6-month case. My long-line (1 year to 3 years) scenario remains unchanged. But with those baselines laid down, I can look at unfolding data over time in order to have a flexible but coherent plan as to how to achieve my goals. I can talk about conceptualizing goals and reality checks and modifications along the way.

There are some events coming out there that will be very unsettling. One of these may be the Chinese reaction to Obama's upcoming meeting with the Dalai Lama. People mistakenly believe the Chinese position on Tibet has something to do with religion or minority discrimination. That superficiality is trumpeted by the media as a reason for Western counter-action. Nothing is further from the underlying reality, which like Kashmir, is all about upstream water. It is sufficiently important that the Chinese military is starting to speak out.

If the meeting goes ahead (and it will), it may result in China intervening in the announced sale by the US of very valuable aircraft contracts to Taiwan. This is a US mid-term election year. If such a scenario occurs, all hell will break loose in Washington and against Obama. He will not be able to take the implied recognition back - implied recognition both of Tibetan independence but also of Taiwanese independence, in a single incident. The Chinese now have a high-tech bluewater navy. The South China sea in now a Chinese lake. No US aircraft carrier will ever go to Taiwan. It is denouement, the recognition of shocking new realtities and the adjustments they require that most unsettle markets. One such market would be currencies.