As the markets continue their global whirl of geopolitical hotspots, a new one has come up this week- the Korean Peninsula. I made reference to it a few times in this space, but have not gone into it in any sort of primer. So, here goes. Since the Korean War in the early 1950’s, there has always been a general state of unease in the region. There have been various skirmishes and military maneuverings, but nothing of any overwhelming consequence since their conflict ended (technically, it never ended because no treaty was signed by the way). In the last 50 plus years, South Korea has thrived economically (even hosting the Summer Olympics back in 1988) with all kinds of technological innovations coming from that part of the world. In stark contrast, under Communist rule (almost autocratic at that), it is hard for anyone to argue that North Korea has come into the 2000’s much less the late 1950’s in any facet as the country has floundered for years. If one does a Google maps search and seeks out a night satellite graph of the region, it is downright startling to note the amount of lights/electricity in South Korea and the dearth of such things in North Korea. North Korea’s ailing leader Kin Jong Il has been ill and is widely viewed as desperate by many. The first big question facing the world, however, is this: does North Korea have nuclear weapons and if so, how far can they be deployed? The second question: if there were an escalating conflict, would anyone else get involved? Well, earlier this week, North Korea noted it is going to sever all ties with South Korea as “punishment” for being accused of sinking a South Korean warship with 46 South Korean sailors perishing on march 26 (even though South Korea seems to have ample evidence indicating this is indeed the case). Kim Jong Il told the military to be combat-ready, a development which caused the Korean Kospi to fall to its lowest level in several months earlier this week with the Korean won weakening more than 3% against the dollar. In the interim, Chinese Premier Wen Jiabao has not acknowledged that North Korea has torpedoed the South Korean ship. Coincidentally, China is North Korea’s largest trade partner. Yet, China certainly wants to avoid a conflict and is arguably concerned that taking South Korea’s side may tip the North Korean government into push for war. China did about $500 billion of trade with Japan and South Korea last year according to Chinese customs data- with less than $3 billion of trade with North Korea. But if the region falls into chaos, it undermines the interests of all nations except of course for North Korea. Basically, China does not want to push North Korea to be aggressive nor does it want to advise South Korea to punish North Korea with warfare. Market-wise, as was shown in the whipsaw action earlier this week, developments in the region have the potential to affect stock prices. The decline in South Korean assets sparked a wave of selling worldwide on Monday night and the lack of action by the Security Council on Tuesday showed a lack of urgency to the matter which the markets viewed as positive. Thus, while the situation is seemingly not of immediate-term consequence (I hope I am right about that), it certainly is a situation to monitor over what could be a very long hot summer on the Korean peninsula.
Markets overnight were higher in Asia by about 1.2% in both Tokyo and Hong Kong. But the major fireworks took place later in the evening as China indicated it will maintain its holdings of its EU-based assets, there were wild rumors that North Korea would apologize for its perceived role in the South Korean torpedo, and a number of major names made bullish conference at a hedge fund conference. This led to a rally in euro shares with prices up 1%-2% for the bourses. The euro is sharply higher (although off of its highs) along with oil which is building on its 4% plus surge from yesterday. Futures are strongly higher as well although off of their highs as of this writing by a fairly good margin (Dow indicated up 150 or so, down from almost 250 earlier). Look for thinner rumor-driven trading all day in a bit of a narrower range than yesterday with illiquidity a key word. Rumors will drive trading all day with some selling into the gap open but the gains likely to stand barring the latest rumor out there. Trade relative weakness into market selling pockets otherwise don’t fight the tape. Focus on the bigger cap names as volume will be at a premium particularly as some traders head for the exits in an attempt to make it a four day weekend.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
NTAP- good earnings
PAY- decent earnings
SMTC- good earnings
FSII- boosted earnings guidance
VOD- featured on “Mad Money” last night
BP- trading higher on thoughts that the company was able to plug the damage via its “top kill” strategy
RGEN- announced FDA and EMA approval of re-analysis of images from phase III trial of its RG1068
COST- decent earnings
TIF- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
CSTR- poor earnings guidance
GS- closed near a low
X- reversed in closing near a low
POT- closed near a low
AAPL- reversed in closing near a low
BIDU- closed near a low
DWA- closed near a low
AEO- closed near a low after issuing poor earnings
FCX- reversed in closing near a low
FSLR- reversed in closing near a low
MCO, MHP- fund manager David Einhorn announced he had major short positions in these companies; featured on “Fast Money” last night
RMBS- said the International Trade Commission extended the target date for finishing its investigation of a patent-infringement case against NVDA
Earnings:
THURS MAY 27 BEFORE
BIG COST HNZ
TIF
THURS MAY 27 AFTER
BCSI JCG NOVL
OVTI
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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