Good Morning

There are quite a few things going on this morning including the market moving up overnight, I don't think the "reason" or mechanism is important, we saw it yesterday, predicted it Sunday night,  hence the AAPL long hedge for the trading portfolio. I don't find this very interesting, I find it "as expected", but don't forget the second half of Sunday night's expectations, using the movement to gather information (what was originally the first half of the day) and then acting on it (likely short entries / add-tos) the second half of the day, only the timeframe was stretched from the first half of the day to the first day.

Today is the last trading day of the year so there are a dozen different reasons for this move or it may be as simple as market jiggles, for instance as I have posted before, even in a full-blown bear market, there are just about as many up days as down days, the down days just tend to be much larger or at least one of three will be much larger. This is why we look at historical markets. put ourselves in the emotional moment and get to understand what is normal and what is not, I call it "Anchoring expectations".

Now, on to some of the interesting stuff. The Egyptian government outlawed and branded the democratically elected former ruling party, the Muslim Brotherhood and branded them a terrorist organization. You may recall our analysis as the Arab Spring moved from Tunisia to Egypt and Mubarak was disposed of. Way back then it was pointed out how the protestors of Mubarak had no fear of the Egyptian military in and around the square, they more greeted them as protectors and liberators and ultimately just who was it that removed Mubarak from power? The Egyptian military.

All the way back then as we covered the Arab Spring as it related to the markets, especially energy as the Suez Canal is one of the most important choke holds in the world for the free flow of oil.

Our analysis and what later turned out to be historical fact was that the Arab Spring which saw Hamas moving in to Egypt via the Sinai Peninsula to organize the Muslim Brotherhood so they could step up as a political force once Mubarak was removed was likely going to bear fruit, but not long lasting by any means.

You may recall that I had said, "It won't be the people who remove Hosni Mubarak, it will be the military", in fact the Arab Spring was perfect cover for the military who already had made plans to dispose of Mubarak. Do you remember why? It is the very political power structure of Egypt ever since Nasser, the same political power structure that put Mubarak in to power that he dared to cross. The real and only political power in Egypt (and Egyptians got a taste of this only after Mubarak was removed) is the Egyptian Military. It is the military who decides who is placed in to power and every leader since Nasser has been put in to power by the military and has come from within the military's own ranks. Mubarak for his part served in the Egyptian Air Force and was a prominent leader as Chief Air Marshal. 

While I'm not going to get in to the assassination of Anwar Sadat which is widely believed to be organized by an offshoot of the Muslim Brotherhood, the one fact that we do know for sure was he was assassinated at a military parade by four military officers; I do think it's important to note that Sadat was initially seen as a figure head puppet very close to Nasser, Sadat surprised many and we know his end and who stood to inherit the Presidency, Mubarak.

Perhaps Mubarak forgot who really controls power in Egypt after one ot its longest serving presidents of nearly 30 years as he snubbed the military and groomed his own son Gamal to slide in to the presidency. I think there's little doubt the Arab Spring was perfect cover for the Egyptian Military to remove Mubarak for this very reason.

After his removal, the Egyptian military broke promises regarding democratic elections as I expected and they were eventually forced to maintain the facade which opened the door to the Muslim Brotherhood's Morsi. At the time I had said, I didn't know how, but Morsi wouldn't be around long, the Military controls Egypt.

So it should be no surprise that the Military Council that now governs Egypt has moved in to squash the Muslim Brotherhood's fairly long history and political ambitions as this was released by Reuters:

Egypt Declares Muslim Brotherhood a Terrorist Group

I think this is interesting as it comes right about the time we have called for a rise in oil after a fairly long base has been put in place.

Here's an excerpt:

“The Egyptian government intensified its crackdown on the Muslim Brotherhood on Wednesday, formally listing the group as a terrorist organization after accusing it of carrying out a suicide bomb attack on a police station that killed 16 people. The move marked a major escalation in the army-backed government's campaign to suppress the Islamist movement that propelled Mohamed Mursi to the presidency 18 months ago but has been driven underground since the army toppled him in July. It gives the authorities the power to charge any member of the Brotherhood with belonging to a terrorist group, as well as anyone who finances the group or promotes it "verbally, or in writing".

"This is a turning point in the confrontation. This is an important tool for the government to close any door in the face of the Brotherhood's return to political life," said Khalil al-Anani, a Washington-based expert on the movement. The Brotherhood condemned the attack on Tuesday in the Nile Delta city of Mansoura, north of Cairo. Earlier on Wednesday, a Sinai-based militant group, Ansar Bayt al-Maqdis, had claimed responsibility for the attack that wounded some 140 people.

In Washington, the State Department also condemned the attack but urged Egypt to have an "inclusive political process." "We condemn in the strongest terms the horrific, terrorist bombing yesterday. There can be no place for such violence. The Egyptian people deserve peace and calm," State Department spokeswoman Jen Psaki said but added: "We also note that the Muslim Brotherhood in Egypt condemned the bombing shortly after it occurred yesterday. We are concerned about the current atmosphere and its potential effects on a democratic transition in Egypt," she added.

The Brotherhood, which estimates its membership at up to a million people, was Egypt's best organized political force until this summer's crackdown. A political and social movement founded in 1928, it won five elections after the downfall of President Hosni Mubarak in 2011.

"The government decision aims to liquidate its political opponents," Mohamed Touson, a member of the Brotherhood's Freedom and Justice Party, told Al-Ahram online, a state-run news portal. Since Mursi's overthrow, the state has killed hundreds of his supporters in the streets and arrested thousands more. Mursi and other top Brotherhood leaders were last week charged with terrorism and plotting with foreign militants against Egypt. They could face the death penalty. A court ruling has also formally outlawed the group.”

The key take-aways are: Who delcared the Muslim Brotherhood a terrorist organization which was the Military care-taker government. What the penalties are which are a minimum 5 years in prison (which in Egypt may as well be a death sentence) and for the group's leaders, an actual death sentence and this includes anyone who supports the Brotherhood, even in writing. It's clear the Egyptian government is once again suppressing political rivals, dealing with the long term thorn in their political side, the Muslim Brotherhood and doing so based on an attack that Ansar Bayt al-Maqdis claimed responsibility for and the Muslim Brotherhood condemned, even though the group is thought to have loose ties to the MB.

I'd be keeping an eye on activities around the Suez over the next several months and of course oil prices.

USO which is tied to WTI crude (and not as acutely sensitive to the situation) has gapped down this morning in what has turned out to be a nearly month long consolidation.

Light Sweet Crude looks like it has more to pullback, although some of the faster 3C timeframes are going positive pretty quickly.

Today USO has shown a strong 5 min positive divergence in to the gap down, I'm keeping a close eye on it as I'd like to have a position there, if some other timeframes join the 5 min in the intensity of the divergence I'd look at opening a position there as USO has done a lot of basing work.

USO 5 min with near perfect confirmation except at the gap down, a very strong leading positive divegrence, I have to wonder if this is a shakeout. If the possibility of an escalation in Egypt were possible (after all there are about a million MB supporters in the country and clear ties to Hamas), I'd sure like to knock oil down and pick it up on the cheap.

One of the issues I thought we really ought to be paying attention to is the ongoing liquidity crunch in China. As noted Wednesday seasonally liquidity needs among banks rise to meet legal requirements at year end, but the liquidity crunch is already greater than any historical seasonal jump.

As you may recall, the PBoC conducts liquidity injecting Reverse Repos regularly scheduled for Tuesday and Thursday, there's been a lot of volatility in the interbank and money markets recently as you know we have been following. Today the Central Bank (PBoC) DID NOT conduct a reverse repo and the 7-day repo rate that banks use jumped 157 basis points to 6.5% almost instantly (it was less than 5% yesterday). It's quite clear that China's liquidity crunch is more than seasonal and this is important because it's this same locking up of interbank liquidity that made the 2008 Lehman era much worse as banks refused to lend to each other on an overnight basis as no one knew at the time which counter-party had what exposure to subprime. Although this is a different situation, the effect is the same, if the liquidity and credit markets freeze or lock up in China as they did in the US circa 2008, look out as the world's marginal driver of economic growth may be facing much bigger problems than lower than expected yearly growth.

FXP/FXI are two assets to keep an eye on. I'd like to see FXP fall a bit more and as long as we can identify accumulation in the ETF, I think it may make for a decent longer term long play on the Chinese liquidity situation.

There are a few other items I'd like to cover such as Consumer Confidence, Chicago PMI and Case-Shiller, but I think now that a.m. trade is burning off and some interesting signals are developing, it's time to take a closer look at the market and assets we have in place and those we may wish to add to.

A Market Update will be out shortly.