The Kcap Trading Blog

"HOW TO" Be a good client and prosper 01/02/08

2008-01-02T16:32:00.000-05:00

There are plenty of books and articles written over the years on what criteria investors should use when choosing a money manager. Analyzing the various money management styles and how they match up to the client’s objectives as well as personality have all been discussed in depth. However, we cannot recall ever reading a “how to” book on what it takes to be a good client once a money manager has been selected. Believe it or not, the responsibility for failed relationships between the money manager and the clients is shared by both parties. This is especially true for clients that retain a money manager in a Separate Account Management structure. Why Separate Account Management? The answer is that this particular style offers the unique advantage of full transparency and full access to the money management team for the client. Therefore, the lines of communication are open creating the ideal situation for a true team approach between the client and the money manager.

The client shares in the responsibility for the short, intermediate, and long-term success of the investment program. Clients that simply delegate their funds to a chosen money manager without understanding their responsibilities in the process usually bail at the first sign of underperformance. Unfortunately, their timing is usually horrendous, and they are notorious for being contrarian indicators. Furthermore, they usually add to their misery by “Performance Chasing” the next hot money manager of the quarter.

Your friendly neighborhood Kcap team has composed a list that all clients should abide by if they hope to have a prosperous long-term relationship after they “carefully” select a money management team:

· All clients need to be realistic regarding volatility. Living with and embracing short and intermediate term volatility is almost always a necessary component to achieve significant out performance over the long term. Clients who unrealistically demand low volatility yet expect high returns are sure to be disappointed and ultimately will switch to a new money manager, but will never be satisfied in their utopian quest. In other words, instead of abhorring volatility, clients should accept short-term fluctuations and even embrace them as opportunities for enhanced returns. Clients who are striving for significant out performance need to accept the fact that some of their statements will be on the dark side. Even the best money managers in the world have a cold spell. Clients need to consciously remember that the long-term trajectory of the account should far out-way the short-term gyrations.

· Clients that understand the long-term strategy that their money manager uses need to also be flexible when the manager deviates for short-term opportunities. We are not talking about style drift, but instead allowing the manager to operate in several time frames i.e. They can be long term bullish, yet remain short-term bearish. Good money management teams need the ability to carry significant cash or even short positions for an extended period of time while waiting for the proper setup to implement their longer term bullish strategy. Clients need to allow the money manager this flexibility with full understanding that the short-term plan may turn out to be incorrect.

· The media, clients, and virtually anyone who invest in the financial markets are obsessed with artificial dates used to measure the performance of investment portfolios. Quarterly ends, and especially the all mighty December 31st are used by clients like a gun to the head of each and every money manager. This has the undesirable effect of forcing money managers to either take outsized risks or avoid opportunistic risks when those critical dates are drawing near. For heaven’s sake, what difference does it make on what the value of your account is on exactly December 31st at 4 p.m. versus January 15th at 4 p.m.? Should you really be making decisions about your money manager based on one single mark in time? Unfortunately most people do, which has a huge negative effect on the performance that most money managers deliver to their clients. Ironically, money managers that do not live and die by theses artificial dates tend to deliver far superior long-term performance than their peers who are enslaved to this ridiculous phenomenon.

· Be a partner in the overall strategy with your money manager. This means that the client should take the opportunity to understand the short, intermediate, and long term views of the money manager. A good money manager can explain in uncomplicated terms the investment strategy for various time frames. The client will have ample information to assess the merits of the investment plan and will therefore be more comfortable with the outcome as long as the strategy is being properly adhered to (allowing for flexibility). Clients that do not want to know how the money manager will achieve great returns but only care about watching the performance will surely bail at the first sign of volatility. In other words, a client as a partner in the plan will have much better staying power as the money manager works the plan. Obviously the client has to believe that the money manager still possesses the intelligence and capability to deliver excellent long term results in the first place.

· One of the most powerful tools in investing is dollar cost averaging. Clients would benefit tremendously by providing their money manager a steady diet of fresh cash that can be utilized especially during volatile markets. There is nothing more beneficial to long-term performance then adding to quality existing positions when they are down. Ironically, clients too often withdraw some or all funds from their money manager at precisely the worst point in time which dramatically lowers long-term performance. In fact, some clients treat money managers as an ATM, which is a tremendous drain on the performance of an equity portfolio. Statistically, it has been proven that clients who add money to quality money managers during times of severe volatility dramatically outperform those that do either nothing or withdraw some of their funds.

· All money managers charge their clients fees based on numerous factors. When comparing the fee schedule between two different money managers, the client should consider factors such as risk management control, access to the money manager, lockup periods, termination charges, front end loads, level of transparency and target returns.. There are other more obvious considerations such as past performance but the above list is too often ignored.

· Clients should not compare money managers with different investment styles. All styles go in and out of favor, which will affect short to intermediate term performance. However, most quality money managers can offer solid long-term performance despite the temporary headwinds of their particular style. Clients that jump from style to style are likely to chase their own tails. Clients should also be aware not to get lured by the “next best thing”. Too often they think someone else has invented a better bread box when in fact staying with the tried and true methodology is the best way to achieve solid long term performance.

· Clients should expect hot and cold streaks from their money manager even when their style is in favor. The best money manager will eventually have a cold hand or fall into a hole that they will need to dig out from. Unfortunately, clients want to only be with managers that have a “hot hand”. This is another large mistake which causes them to chase their tail as they rotate from money manager to money manager.

· Clients should show a sense of loyalty and offer encouragement to their money manager. The money management business can be very cold. Clients that show loyalty, long term commitment and encouragement during those stressful times help the money manager to remain confident and clearheaded. This will help the money manager to avoid taking unnecessary risks but rather provide the confidence to take well calculated risks. In other words, a book of clients that know how to act maturely during stressful times is extremely important to the money manager to deliver successful performance. Experienced money managers should cut lose high maintenance clients that provide negative energy during times of underperformance. In other words, everyone benefits when the whiners and complainers are eliminated (good bye and good riddance).

· Clients need to fully understand the differences between momentum and contrarian investing. Furthermore, clients need to commit to the pros and cons inherent in whatever particular style is being used. For example; there are specific negatives inherent to contrarian investing such as enduring short-intermediate term underperformance. Tremendous patience is a must. On the other hand there are significant negatives to momentum investing as well; such as the potential for sharp volatility in the value of the portfolio. Clients that understand the downside to the style that is being utilized will be much more at ease through the long term investment plan.

· Clients would be far better off concentrating solely on absolute performance as opposed to relative performance verses an arbitrary index such as the S&P 500. Trying to always stay close to the relative performance of an index is an excellent recipe for mediocrity. Most of the time, superior long-term results are delivered by ignoring the averages. Short or even intermediate term underperformance is usually a necessary evil in the quest for superior long term performance as has been mentioned earlier. This is especially true with contrarian style investing.

· Clients should not pay any attention to the media cheer leaders or dooms dyers. Those entities always live in the short-term, and only know how to extrapolate current market conditions into the long term. They are only after ratings and do an excellent job of proving to be contrarian indicators for savvy money managers. DO NOT GET SWAYED BY THEIR AUTHORITATIVE EXUBERANCE!

· Clients need to understand the strengths and weaknesses of Wall Street analysts. Simply put, most if not all are nothing more than glorified accountants that are completely useless with their stock recommendations. They have virtually no feel for the psychology of the market which is 90% of the game. Timing is everything with stock selection and they have NONE! However, they do provide some research for smart money managers to use in making their OWN decisions about IF and WHEN a stock should be bought or sold.

· Clients should never micromanage their money managers. Active money management entails buying and selling many stocks often resulting in losses. A client that sees many losing transactions should not be concerned as this is often a case of good risk management techniques being deployed by the money manager such as tight stops, etc. Money managers often deliver strong overall performance despite taking many realized losses in the account. Realized losses also help with tax planning.

· Clients need to stop having aversions to large quantities of cash that the money manager might be carrying for extended periods of time. The money manager is responsible for long-term performance, and if he feels carrying significant cash is the appropriate thing to do than the client needs to respect that decision. Fees should be unaffected by the amount and length of time that high cash levels remain in the portfolio.

The above list is not comprehensive, but covers many of the pet-peeves that your friendly neighborhood Kcap team has endured and learned from over the years. For this reason, we are very selective with who we take on as a fee paying client.

Many readers of the Kcap trading blog whom are not fee paying clients have asked us to publish our returns. We are happy to report that the range for our client base in 2007 was up approx: 50% - 75% while the S&P 500 was only up approx: 3%....oops there’s that relative performance thingy.

Predictably, a few immature clients decided to pull out some money early in the year before our awesome returns really kicked in. Our bearish posture in the first half of 2007 had us slightly underperforming the S&P 500 at that time. Those clients that pulled some money away (others were asked to leave) were the type that failed most of the criteria that we outlined above. They missed out, and as Mr. T would say, “We pity the fools”. Happily, most of our clients remained fully engaged and are loving life with Kcap.

If You Held A Taser To Our Head:
Your friendly neighborhood Kcap team will continue to be uninterested in mediocrity. We will continue to implement the strategy of accepting and even embracing short-intermediate term volatility which we believe is a necessary component that through trading produces excellent long-term results. In addition, momentum and contrarian investing will both be deployed in our client’s portfolios which are guaranteed to produce volatility and at times underperformance (respectively) in the values of their accounts. This is our style and we remain excited and confident that significant long-term outperformance can be achieved. We encourage our existing clients to adhere to all the guidelines listed above. We are straight forward in our dialog to our clients and always look for willingness for them to follow these guidelines. Those that will not should leave.

This will be the last post of the Kcap Trading Blog for a long while. We are just too busy navigating the financial markets to maintain a regular posting schedule. The huge gaps between posts are unfair to the readership and we have decided to postpone this blog indefinitely. We will consider restarting the Kcap Trading Blog under a subscription service in the future as we add more resources. However, you may catch us posting to the free blog once in a blue moon just to say hi and share some thoughts.

If you want to start a fee-based money management relationship with Kcap, and have ($1.5 Million dollars net worth, including your home), call us to further explore at (732)617-9001. Oh,…and please call us only if you think you can meet the criteria that we have outlined throughout this final post.

Until next time, whenever that may be; Thank You Very Much for reading the Kcap Trading Blog – Hope it was informative, fun, and profitable.
All the Best,
Mitch and The Kcap Team

*** The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (KTB) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (KCAP) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts. None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds. Clients of KCAP, as well as the firms principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com. The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.

Alan and Ben 9/24/07

2007-09-24T01:01:00.000-04:00

A significant amount of discussion has been targeted towards the comparison of Alan Greenspan and Ben Bernanke. Indeed, there are great reasons to dissect the similarities and differences of both men’s particular styles in managing fed policy. The implementation of FOMC policy has great repercussions to global financial markets. However, as traders we must remember that the Fed determining monetary policy is both science and art yet the market is not keenly aware of that fact. The degree to which each is used by the Fed depends largely on the person wielding the sword. Therefore, it is important to examine the differences of how fed policy will be administered under the new chief Ben Bernanke versus Alan Greenspan.

Alan Greenspan has frequently been referred to as maestro. Barely three months into his new job as Fed chief in 1987, was he tested with the October 19 crash. Most historians would agree that Greenspan handled that crisis and subsequent financial debacles over the years with incredible expertise. Greenspan is a master of understanding the complexities of the financial markets and how they are entwined with the real economies. He is also unmatched in his ability to communicate his intentions in a way that kept market watchers informed yet unable to predict his next move. He is widly recognized for implementing a strategy that helped Foster economic growth through the use of low short term interest rates due to his staunch belief that increased productivity from the advent of technology was a sustainable force in the global economy. Importantly, he believed that the high productivity levels that we enjoyed in the late nineties were instrumental in keeping inflation at bay. Greenspan fully embraced this concept and was therefore less concerned about being preemptive in fighting future inflation. A more preemptive Fed would have hindered economic prosperity at that time.

Many people fail to recognize how much art as opposed to science Greenspan used in deciding short term monetary policy. He was not afraid to take swift action when the financial markets called for it regardless of the long term affects to the real economy that the inflation hawks screamed about. Often, he would adjust short term interest rates inter meeting based on his gut feeling of how the real economy might get affected by short term stress in the financial markets. He felt comfortable taking strong action due to his overall comfort level with long term inflation. In other words, he felt that he had the maneuvering room to address short term hiccups whenever they occurred. Essentially, Greenspan handled monetary policy much like a short-term trader handles volatile stocks in a portfolio. He had tremendous confidence to utilize his instincts and commanded respect in the financial community to put policy into action without being challenged. Ultimately, this became known as the Greenspan Put.

Ben Bernanke is perhaps the polar opposite of Alan Greenspan in many ways. Ben is much more of an academic than Greenspan and therefore administers fed policy in a much more scientific way. Economically, the key difference between the two men and their economic philosophies has to do with their belief in the importance of expectations theories. Simply, research around expectations theories imply that markets adapt to economic policies. How well it adapts is dependent on the market’s view of the level of commitment to the policy by its creators. Greenspan, in his nearly 20 years as fed chief, shied away from intermediate term expectations policy and relied much more on addressing short term hiccups due to his overall comfort with the long term economic outlook.

Having a new Fed chief (Ben) who demands that markets adapt to fed policy based on intermediate economic forecasts for growth and inflation will have profound market implications that are different than the Greenspan era... In essence, the markets are likely to go through bouts of love and hate relationships with this new Fed chief. We can expect that this Fed chief will sometimes be perceived as a rock star much like Mr. Greenspan and other times like a stubborn mule unaffected by the misery that the financial markets may be experiencing at any given time. The threat of short term dislocations in the financial markets and possible spill over to the real economy will not prompt this new Fed chief to act until he sees actual evidence that threatens his intermediate term forecasts. In other words, the new fed chief will only appease the markets when there is clear evidence that the real intermediate economic forecast is being negatively affected due to stress in the Financial System, unlike Mr. Greenspan who played the financial markets with rate adjustments almost at his whim.

All in all, Alan Greenspan had the approach of a short term stock trader and the control of a maestro, while Ben Bernanke has the stuffy feel of an academic, frequently satisfied to delegate decisions to the consensus of the board of fed governors. This also holds true for the intermediate-term economic forecast that is currently in place at the Fed which is the lynch pin of current monetary policy. Market participants need to understand this key difference between Alan Greenspan and Ben Bernanke in the implementation of Fed policy going forward.

If you Held a Taser to Our Head:
The Fed recently acted aggressively in the face of the current credit crises by reducing the short term target rate by 50 basis points. Thankfully, recent economic data pointed to a marked slowing of the economy. Had this not been the case, the financial stress in the stock and bond markets would likely have not been enough to warrant such dramatic action from this new Fed chief. Your friendly neighborhood Kcap team firmly believes that Greenspan would have acted aggressively even if the economic data did not show a noticeable slowdown in the economy.

The rally that has been taking place in the stock market over the past 3 to 4 weeks has largely run its course. Perhaps a little more upside is in store due to the psychological boost from the aggressive fed action. However, make no mistake about it; this credit crisis is not over and has many more months of pain to inflict on the Financial System. When key overhead resistance levels are hit on the major averages (specifically around the all time highs), the market will be vulnerable to more bad news regarding the credit crisis….. And yes there’s plenty more bad news to come. In essence, the market is experiencing a counter rally in a larger downtrend. Therefore, we firmly believe that we have not yet seen the lows in the NASDAQ or the Dow. Once the countertrend rally has played itself out, the market will be ripe for aggressive short selling again.

Hope all is well.

The Beginning of the End? 7-30-07

2007-07-30T01:09:00.000-04:00

Has the Market finally cracked? Are the Bears finally going to be vindicated? The ursine views have been plentiful but completely ignored for sooo many months. Time after time those dip buyers have managed to step in to save the day taking the market to new highs. No amount of negative news has deterred them despite the overwhelming evidence that a nasty pullback was tremendously overdue. The question now is whether the recent downdraft constitutes the beginning of a change to the uptrend.

After such tremendous success that the bulls have enjoyed for so long a change in trend can only materialize from very specific price action. In other words, Traders would be unwise to place too much emphasize on actual news content as the underlining reason for the beginning of a Bear rout. This is due to the fact that the ursine arguments have been around for quite a while. In essence, we must defer to the actual price action within the market and key underlying securities to help us determine if there indeed is a physcological change.

In our prior post, we outlined several areas of concern that might serve as the catalyst for bearish action. The first one that we mentioned described the ramifications of a credit crunch for private equity players and associated balance sheet risk for large financial institutions. Apparently, this concern seems to be the straw that is in danger of breaking the Bull’s back. However, even this catalyst is not as important as the actual price action that we must pay careful attention to in the coming weeks. The market is just as likely to fluff off this credit concern as easily as it has disregarded so many negative developments in the past. On the other hand, the market can choose to extrapolate this credit crunch to the global economy and start to simultaneously heed all the other Bearish arguments as well. Oh my, not knowing is so UNBEARABLE! What is a Trader to do???

The market is entering an oversold condition this week. In addition, end of the month window dressing may provide a decent excuse for the dip buys to reemerge. Should a rally occur (and we expect it will), it will be very important for the beleagered financial sector to lead the rally. Furthermore, the internals such as breadth and volume need to be at least as strong as they were weak during the recent decline. Favorite stocks that helped define the bullish psychology such as Apple Inc. need to assert themselves in a leadership role. If the bulls can put these key attributes together, then there is still a chance that the Bears will go back into hibernation. On the other hand, if the rally is lacking ANY of these key ingredients, than the danger of a horrific Bear attack will become very real. In fact, your friendly neighborhood KCAP team has been long preaching that the Bear attack (when it finally gains traction) will be utterly gruesome. Unfortunately, this has caused us to sound the defense alarm way too early.

Simply put, there is only one way to know if this is the beginning of the end. We will need to judge the makeup of the reflex rally. Regardless of its internals, traders and investors would still be wise to protect their capital by raising more cash or hedging. We are also not opposed to shorting the major indices at this juncture with loose stops to allow for increased volatility. We acknowledge that KCAP has sounded the Bearish alarm prematurely over the past several months; however that does not mean that we have been incorrect in our assessment of the tremendous downside risk that this market has been carrying for quite some time.

There are times in the market when the downside risk is mild or moderate. Impeccable timing during those times will not save our readers significant money from losses. However, there are other times when the downside risk is severe and we are often premature when we send out the warning. The benefits of heeding that advice are usually much appreciated AFTER much patience is exhibited. Remember, those who called a premature top in 1999 but stayed with their convictions were ultimately more than vindicated.

On a more fundamental note, we have been feeling very concerned about the underlying message that is coming out of the Fed recently. After studying recent minutes and various testimonies from Big Ben , it has become evident that the Fed sees itself in uncharted waters. They have recently signaled that the use of the Philips Curve will be even less helpful in their quest to balance inflation and growth. They have also signaled their concern about a systemic slowdown in productivity. Unfortunately, they seem to be groping for a methodology to accurately model future Fed policy. Recent Fed remarks about the utilization of “expected inflation” as a tool to target and adjust policy are indeed disconcerning. The uncertainties surrounding such a methodology will lend itself to significant adjustments and second guessing by the Fed as well as the financial markets. This will significantly add to the volatility to Global Fixed Income and Equity markets in the coming years. Furthermore, an uncertain Fed raises credibility issues and translates to uncertainty in the financial markets.

Most professionals have learned the hard way that uncertainty is far more damaging to financial markets then even severe and prolonged negative news flow. What is even more shocking to us is how little commentary there seems to be from market professionals about the Feds apparent plea to the academic community to help it model future inflation expectations and growth implications in the new global arena. We find the Feds state of confusion to be quite distressing. Expect to hear more chatter about this topic from market gurus in the not too distant future. However, the market is preoccupied with issues of credit for the time being.

If You Held A Taser To Our Head:
We are still of the mindset that the risks out way the rewards on the long side in the current environment. While we believe a reflex rally is in the cards, the chances for failure are quite high. Importantly, should that failure materialize, there’s a long way to FALL… and we’re not talking about autumn. We are cognizant of the stubborn nature of the dip buyers and how they may save the day yet again. Regardless, the market holds a higher level of downside risk than most people are aware of…. even the Bears. Although this has been true for some time, and has made anyone with a defensive posture look downright silly, the day of reckoning will be at least as ugly as the rally was beautiful. In other words, play defense regardless of the internals of the expected reflex rally.

We understand that many readers are frustrated with our almost non-existent posting schedule. Perhaps we will beef it up again sometime later in the year. However, our fee paying clients are receiving tremendous personal attention. Those of you that wish to join should give us a call at (732) 617-9001.

Hope you are doing well.

"Natural Causes" 5-30-07

2007-05-30T13:58:00.000-04:00

What was the catalyst that actually popped the “dot com” bubble? Does anyone remember? Amazingly, there is no consensus of what the actual event or catalyst was that sent the market spiraling to hell in a hand-basket. Do not suggest valuations, rampart speculation, or dubious metrics that were used to calculate valuation of the so called “new economy”. Those greater fool games persisted for quite a while before all of a sudden on one day they seemed to matter. The reality is that there is no one dramatic catalyst that derailed the greatest bull market of all time.

When reflecting back to those days, few will remember when President Clinton and Prime Minister Tony Blair jointly stated that the tremendous benefits derived from the mapping of the human genome needs to be made available to the public for little if any cost. Believe it or not, the NASDAQ started to become unglued just after their public remarks despite the fact that the biotechnology sector was not leading the NASDAQ at that time. Apparently, sentiment towards speculative stocks finally began to be questioned in earnest. Mind you, there were many times before in which speculation was seriously questioned. For some unknown reason, the speculative trend abruptly changed on or around that exact time. Was that the catalyst?

When looking at today’s market, bullish sentiment is pervasive. Sure, there are many skeptics who have not fully embraced the market, but we challenge you to find anybody willing to aggressively short this market. The bulls have been taking comfort that the bear case is too widely understood which is the reason that it fails to translate into lower stock prices. The theory is that too many have already taken defensive action due to the obvious concerns that the bear case lays out. Therefore, there is sufficient sideline money to keep the market drifting ever higher. While that certainly may have contributed to the relentless rise in the DOW over the past several months, it now seems reasonable that the bull case has become equally apparent. Ultimately, the sentiment will change, resulting in sharply lower prices. The problem is that identifying the specific catalyst is next to impossible.

Here are five areas of concern that Kcap believes can magically serve as the catalyst that reverses the uptrend:
1. The market is being largely fueled from private equity firms insatiable appetite. Therefore, nobody wants to short even a Bad Company (hey, wasn’t that a rock group in the 70’s?). Unfortunately, the major private equity players are starting to feel a little dizzy at these heights. Should their access to capital fall into question, the market would not take it kindly. The risk of the spigot being abruptly turned off due to higher interest rates and tighter credit standards from financial institutions is very real. After all, it is the major financial firms that are shouldering much of the risk in this latest episode of leveraged buy outs.

2. The slowing U.S. economy is indeed a serious threat and growing more alarming every day. Major retailers such as Lowes and Staples are showing no signs of bottoming with their dismal forward guidance. The housing sector is also showing no end in sight in its deterioration. Interest rates are starting to creep higher on a global scale which will further dampen the beleaguered housing sector and worn out consumer. Financial institutions have a historically large 38% of their loans secured by real estate… not a pretty site for this potentially ugly vicious cycle. Furthermore, gas prices are at all time highs and hurricane season has only just started.

3. Most importantly, the U.S. is catching a tremendous positive spillover effect from the out of control Chinese Index. The Chinese stock market has almost quadrupled in the past couple of years and is due for a very nasty correction. A dramatic pull back in that market will have serious consequences for the world’s growth forecasts. Even Allen Greenspan sent out a warning beacon which was largely ignored primarily due to his poor timing of his irrational exuberant speech in the mid 90’s.

China’s recent one day correction of 10% a couple of months ago are now a forgotten memory as that index has soared over 70% since then. The Chinese public is literally picking stocks based on numerology and astrology verses fundamental analysis. There are over 300,000 new brokerage accounts being opened in China every day.

All actions to date from the Chinese government to slow the assent of the speculation have failed. If the Chinese economy and its financial market are the primary engine of growth, what will replace them when they abruptly stall… especially when the U.S. economy is riding in the back seat of the Chinese racing car? Picture yourself sitting in the back seat of this car with an inexperienced Chinese driver as he zooms ahead at over 180 miles per hour. Also imagine that one of the wheels on the car is missing a few LUGNUTS! That is what the current market environment feels like to us.

4. Much is being made about the “shrinkage” in the equity markets these days. Buy backs and private equity firms have been removing available shares for purchase. While this is another excuse for momentum players to bid stocks higher, we must never forget how quickly and in unison market participants act. In other words, these momentum bulls will not be willing to buy even ONE share of any company when the $#!~ hits the fan. The decrease in outstanding shares in the overall market due to shrinkage will not cushion the fall. In fact, it may actually fuel the drop as traders actively search for shares to short that are no longer plentiful.

5. Many people are drawing comparisons to today’s market to the mid 90s. We take exception to that analogy due to the fact that GDP averaged 4% during 1994-1998 while inflation fell from 2.5% to 0.7%. Today, GDP is averaging 1.25% while inflation stubbornly persists around 2.5%. The threat of recession is on the horizon with even higher inflation due to commodity prices. Clearly the fundamental backdrop is different compared to then.

If You Held a Taser to Our Head:
When an old person who sufferers from many ailments finally dies, people ask what was the actual cause of death. The answer often comes back that he died from “natural causes”. Today’s bull market is old with many ailments. Ultimately, the media will state that the rally which commenced in the summer of 2006 died of “natural causes”. The only problem is that their conclusion will be broadcast AFTER the market suffers tremendous dislocations to the downside. All profits and more will ascend to money heaven. Everyone will talk about how a market that looked sooo good suddenly looks sooo bad; and no one will want to buy even one share.

Dangerous times ahead.

"Thats Hot!" 04/08/07

2007-04-08T19:31:00.000-04:00

Yes Paris, the economic report was indeed “Hot”.

On Friday, market non-participants (due to the long holiday weekend) were treated to a surprising nonfarm payroll and unemployment report. Most were anticipating soft numbers largely due to the recent soft readings in previous economic data. Surprisingly, nonfarm payrolls came in at a strong 180,000 new jobs (higher than expected) while unemployment inched down to a historic low of 4.4%. Previous month’s jobs gains were also revised higher.

Although many were hoping for soft economic data in this report in order to increase the probability of a future Fed cut, the futures soared higher immediately after the release. How can this be, you may ask…? Well Tevya, very few traders were positioned for the long side ahead of the Holiday weekend and an unknown variable such as the formidable unemployment report. Furthermore, the slow dead-cat bounce that the market has been experiencing over the past couple of weeks has run into significant overhead resistance that has not gone unnoticed by market technicians. This has forced many into defensive positions. Therefore, the market was poised to have a short term pop regardless of what the actual figures came out to be.

The economy is at another tricky juncture. The housing meltdown probably has more to play out. Importantly, the ripple affect from declines in the housing sector has yet to be felt by the consumer. The market which intuitively understands this inevitable outcome continues to hope for a Fed rescue before the housing "soot hits the fan". Unfortunately, the strong jobs report implies wage inflation pressure in the making.

Friday’s 4.4% unemployment rate is exactly what the Fed did not want to see. The Fed believes that this historic level of full employment dramatically increases the risk of wage pressure in the system. This in conjunction with recent deceleration in productivity creates a dangerous brew of implied future inflation. The Fed has now been placed into a situation in which their magic rate cuts can only be delivered AFTER the housing spillover takes hold on the economy. More importantly, the housing problem in combination with implied wage pressure means that the economy is likely to suffer moderate stagflation before the Fed will be willing to act…not pretty.

The market being a discount mechanism is likely to sniff this out and offer some more pain in the not too distant future. The timing of the next leg down is difficult to preciously predict due to the very slow momentum moves that the market has been experiencing over the past several months. However, make no mistake about it, a second and third leg down to lower lows is a large probability (in our humble opinion).

If You Held A Taser to Our Heads:
We continue to believe that the NASDAQ will visit lower lows over the next few months. We have a lose target of NASDAQ 2250 before we are willing to get aggressive with a buy and hold strategy. We would not even be surprised if 2250 is breached in a quick but meaningful way. In the meantime, we are doing plenty of day trades (primarily using ETFs) on both the long and short side. Our stops are tighter than…well use your imagination.

Many readers have been complaining about our very infrequent posts lately. We understand your frustration, but need you to understand the intention of this Trading Blog. Originally, it was set up as an efficient method to communicate with our fee paying clients. Ultimately, we started attracting a steady non fee paying audience. Over the past several months, much of our communication with our clients have been telephone based.

For all the readers that have enjoyed The Kcap Trading Blog that are not fee-paying clients, feel free to call or e-mail us in order to explore a more in-depth relationship. Perhaps in the future we will revert to a more consistent posting schedule (which will likely include a subscription based service). In the meantime… be careful out there!

Going "STAGflation" to the party? 3-22-07

2007-03-22T11:56:00.000-04:00

So that was it? The end of the correction… Not! Corrections only end when people stop referring to them as corrections. When market participants are convinced that something much more hideous is underway, a correction can truly find a bottom. Unfortunately, the past few weeks never offered such a scenario, even though there were a few scary moments.

However, the market will likely continue to suck in the underinvested bulls and nervous bears before it continues the downtrend that started a few weeks ago. The “end of the correction” is being celebrated as dip buyers resume their dip buying activity that worked so well since last July with only a minor recent interruption. Ultimately, market participants will be faced with a critical decision as to whether or not the market is forming a double top or threatening an upside breakout. This pivotal moment may be approaching fast. So start choosing sides.

The dip buyers will have you believe that yesterday’s Fed language painted a rosy scenario. These stubborn bulls will preach that the power of a rate cut in the not too distant future will be the juice that is needed to cause the market to break out to the upside. The bearish camp will tell you that although a Fed cut seems likely sometime in 2007; real economic pain must be felt before the Fed actually acts. Remember, the Fed is always more concerned about fighting inflation then preventing recession. Therefore, although they may have slightly greased the wheels for a cut, the fed will certainly be waiting for the economy to cry uncle before a rate cut is actually delivered.

Unfortunately for the Fed, they are at a very tricky juncture. Their statement yesterday describes an economy that is showing signs of cooling with elevated signs of inflation… STAGFLATION anyone? Most market professionals who have been around long enough understand the dangers of being too heavily long a market in which the Fed is fighting stagflation. Evidence of the Feds quandary can be found by looking at their actual words compared to the January statement. The January Fed statement described “Somewhat firmer economic growth and stabilization in the housing market”. This has been replaced with “recent indicators have been mixed and the adjustment in the housing sector is ongoing.” Clearly the fed has taken notice of the cooling economy with this change in language.

More alarming is how the central bank altered the inflation paragraph. The new language reads “Recent readings on core inflation have been somewhat elevated”, as opposed to January’s statement which states: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time”. Kcap is not surprised by these changes in language since recent economic data points have demonstrated elevated inflation (Hot PPI report) in conjunction with sub prime woes.

If You Held a Taser to Our Head:
Did anyone notice how the complacency dropped like a rock with the collapse in the Vix? Market Participates are once again getting all lathered up over an immanent Fed cut. Most seasoned traders on Wall Street should have learned by now that the economy must suffer MUCH more before the Fed actually delivers. Only when inflation is well behaved due to accelerating productivity can the Fed cut rates when the economy is just showing preliminary indications of cooling. Most of the time, the Fed cuts rates when ugliness in one sector of the economy has already spilled over into other sectors. We are not at that point …yet! However, don’t fret… earnings season should provide a window of opportunity for the doves. Have you ever seen a Bear eat a dove? It’s not pretty! Patience and lots of cash is the way to play. Another way to think about the market and rate cuts and in keeping with the season, “you have to sit through the Seder before you get to the meal.”

Hope you’re being careful out there.

Gotcha! 2-27-07

2007-02-27T17:24:00.000-05:00

Good Evening.

Do we feel vindicated in light of the fact that your Friendly Neighborhood Kcap Team has been preaching to “watch out below” for quite some time? Do we feel vindicated in light of the fact that attractive prices in everyone’s favorite technology stocks exist once again? The short answer is…not yet vindicated, but soon. Most market participants resigned themselves to the fact that the only way to make money was to chase the extended ‘momo’ stocks that have gone parabolic over the past several months. Even experienced professionals who felt extreme pressure from their client base were forced to chase stocks at prices that were against their better judgment. Tomorrow morning, those same professionals will receive calls from the same clients, ripping the Money Managers a new ‘O’ for buying stocks at such ridiculously extended prices. The money management game is clearly a Catch 22.

Since the market has been so extraordinarily unreasonable over the past seven to eight months, traders should not expect any sort of logic to magically appear on the downside. In other words, although a new downtrend may finally emerge, the amount of head fakes are likely to be abundant. Ultimately the NASDAQ should give up virtually all of its gains that have been tacked on since late summer 2006. Do not be surprised to see the NASDAQ trading around 2250 before summer 2007. However, the path to 2250 is likely to be one of high volatility as opposed to the sickening, low volatile climb that the market beast has bestowed upon us over the past several months.

Very few Hedge Funds were prepared for today’s tremendous sell off. Virtually all Hedge Funds are still very net long as we type. In addition, many fund managers have never even experienced a downtrend that starts with a day like today. The head fakes are likely to chew them up over the next couple of months.

We are not predicting that the market will continue its decline in the coming days. Rather that the coming months will be extremely difficult for Bulls and Bears alike. However, the edge will clearly lie with the patient (and we mean extremely patient) Bears. Essentially, Traders must remember a very golden rule on Wall St. That rule states: “There is a tremendous gap between where trapped, long side momentum players stop selling and value players start buying.” That gap is also known as THE DEEP “abyss”. One thing for sure, when we enter THE DEEP abyss between now and the summer, there will be no signs of Jacqueline Bisset in a wet t-shirt. Who remembers that movie?

If you held a Taser to our head:
We have increased our short exposure and will continue to add to that posture on any rallies. Now that the VIX has spiked dramatically, expect more volatility and be patient scaling into your positions. As you know from reading our posts, your friendly neighborhood Kcap Team has been fully prepared for this type of action.

Hope you’re doing well.

Same 'Ole, Same 'Ole 2-15-07

2007-02-15T15:41:00.000-05:00

Good Afternoon.

The market continues to exhibit remarkable resilience. Every time the Bears seem to get the slightest bit of an edge, the Bulls retake control and administer some more nicks and cuts to the ursine crowd. In fact, the Bears have been so battered over the past 7 months that the Bulls can easily have their way with them. Kinda reminds us of how Mr. Peepers from SNL devoured an apple. Think of that next time when the market suddenly springs to life as it teeters just above key support levels.

Big Ben has been doing his "thang" to the senate and house over the past couple of days. Essentially, he has reiterated the "goldilocks" scenario which has added more fuel for the Bulls. Many were dreading a more hawkish testimony; when that failed to materialize a nice relief rally took hold. However, the mojo seems to be a little light on this particular rally compared to the countless others that we have seen over the past several months. In fact, most of the upside has been coming from stocks that are bouncing versus any breakouts. This usually foreshadows better times for the Bears.

The earnings season is now complete and the corporate performance overall was lackluster. Amazingly, the market will look ahead to the preannouncement season that should start to make noise in the next few weeks. Market participants were disappointed with the corporate earnings growth and guidance which was announced in January. Therefore, they may be more hesitant in running the market up into the next go around.

The Gold and Energy stocks delivered a nice shakeout over the past month or two. They have since come back (especially Gold) and are starting to form a nice base at key levels. Oh, and Winter finally came to the Northeast despite what a few Energy Bears were starting to believe a few short weeks ago. OPEC has done a nice job of bringing down inventories and has even signaled that further supply cuts may not be needed. Are they anticipating tighter supply in which it would be difficult for them to keep up as was the case in early 2006? The U.S. Economy has certainly shown signs of stability taking the recession trade off of the table for the time being which also helps the intermediate term case for Oil.

If You Held a Taser to Our Head:
We continue to hold a healthy smattering of Energy and Gold longs. We also find ourselves dinking around with ultra short term trades on the long side due to our significant distrust of the market. We see many signs of danger and you can add the extremely poor relative performance of the Small Cap index versus the senior averages to our long list of complaints. Eventually reality will prevail and this market will give up a huge portion of the recent gains. The fact that the Dow and S&P 500 have not suffered more than a 2% correction since July is ominous. This type of action has not been seen in over 50 years and has made the job especially difficult for Money Managers who have any capability for market timing and or hedging. Only the Long Only funds are happy, in fact they are downright arrogant! Arrogance does not last long in the financial markets and always ends badly.

Hope you're doing well.

Ben and Vista may hit Bulls in "Kissa" 1-26-07

2007-01-26T18:31:00.000-05:00

Good Evening.

Despite the sell the news reaction in the market lately to earnings reports, the Bears cannot seem to muster any traction. In fact, the earnings reports so far have been lackluster which further emphasizes the weakness of the Bears.

All rallies eventually come to an end, although this one feels like an eternity. The ending of the low volatile, relentless climb higher like we have seen over the past 5 - 6 months will probably culminate with simultaneous good news events. Therefore, MSFT's great earnings in conjunction with the launch of Vista next week may provide the final catalyst for the Bears to gain the much needed traction. Oh, and don't forget that we have Big Ben on Wednesday's FOMC meeting, who is likely to sound a "wee bit hawkish" due to the economic data trends as of late.

Regarding MSFT, we were very impressed with the HUGE differed revenue that the company was able to achieve. A year ago, your friendly neighborhood Kcap Team predicted that MSFT would offer coupons in order to compensate for the delayed Vista launch. We correctly projected that this would quell the concerns that MSFT and PC investors were feeling at the time. Well at least Kcap got that right, more than we can say about our recent cautious posture.

The market did a lot of technical damage yesterday after it reversed so dramatically to the downside. The Bovines will soon be schvitzing if the averages only achieve a lower high next week. This will be especially ominous as we enter into a "news vacuum" post Fed. The MSFT hoopla will temporarily die down as will the underlying bid from anticipation of corporate earnings. The recent sell the news reaction that has gripped the financial market may start to accelerate as we fall deeper into the news vacuum. Yeah, we know, we have said this kind of stuff before only to have the Bulls save the day. However, only fools believe that trees grow to the sky especially while complacency remains at historic highs as measured by the low volatility index. Yeah, yeah, we know, the volatility index has been at historic lows for quite a while already. Although this index is not the best short term timing device, it definitely needs to be respected for intermediate and longer term directional change.

If You Held a Taser to Our Head:
Your friendly neighborhood Kcap Team continues to maintain a diversified balanced portfolio. We are overweighed in energy and gold, although have been trading around our energy positions lately. We are light on technology and even short some semiconductor names as well as the IWM small cap index. We believe that the Semi's are likely to lead the NASDAQ lower when this party finally decides to wind down. The Small Caps are also exhibiting poor relative performance and represent juicy short opportunities in the high beta names.

As for Large Cap Tech, has anyone noticed how much time CSCO has given "dip buyers" to add to their positions lately? When CSCO offers days of attractive entry of about 10% off its recent high, alarms should be sounding that the bottom for that stock is not yet in. Should CSCO see more serious downside in conjunction with the weak Semi's and a resurgence in energy stocks, the NASDAQ may indeed finally correct and noticeably so.

We apologize for the very infrequent posts as of late; our attention has been on the market and our clients. For readers who are interested in starting a direct relationship with Kcap, please visit our website kleinercapital.com to request more information.

Hope you're doing well.

Broken Record (and we don't mean the market)! 1-11-07

2007-01-11T17:31:00.000-05:00

Good Evening.

Another day…another rally, another day…another Cliff in the market that quickly gets bought. When the SAP news hit the wires of a shortfall, the market quickly Cliffed to the downside. The Bulls, laughing with bravado, wasted no time in using their margin buying power to take advantage of the sharp decline. This game has become all too easy for the Bovines.

Essentially, there are virtually no Bears left in the woods, just road kill. The market is at multi-year highs, with very few participants holding substantial short exposure. Ominously the earnings will start coming in fast and furious over the next two weeks which could be the catalyst that may resurrect the Bears. However, those arrogant Bulls are completely confident that the earnings and guidance will be far superior then expected, inflation is dead, energy is permanently in the tank and "the surf's up" in January! Oh, and Ms. Universe has realized her dream of World Peace! Do these things make you laugh? They sure tickle us, knowing the Bulls have truly priced in all of the above!

The problem for the Bears of course is that markets always move to extremes of irrationality. Clearly we are in one of those extreme moments. Unfortunately, measuring end points within an extreme is the most difficult of all tasks. Too many emotions and "non-market" decisions are influencing the major indexes.

If You Held a Taser to Our Head:
What is a market participant to do? The answer is to pick your poison! You can hold your nose and participate in this game of Russian Roulette and hope you continue to get lucky…punk! On the other hand you can exercise extreme patience by keeping a well balanced portfolio of longs and shorts as well as a healthy hoard of cash! The former offers immediate gratification but causes an ulcer, knowing that the day of reckoning will show up unannounced. The latter also rips a hole in your gut while your portfolio continues to underperform the major averages! For Money Managers, the latter is exponentially more painful. However, for individuals history has shown that the game of Russian Roulette (the former) ends badly and is irreversible. In other words, protect your capital and wait for another opportunity that will surely come.

"Bear" with us!

'Lotta Weather We're Having! 1-3-07

2007-01-03T17:42:00.000-05:00

Happy New Year!

The unbelievably mild weather that has been plaguing the North East (if you're an Energy Bull) had a rather nasty effect on the energy complex today. Most stocks in that group suffered severe dislocations to the downside to the tune of 4% - 6%. A downgrade in the group from Goldman Sachs combined with a disappointing report from NBR added fuel to the fire. Apparently, traders have resigned themselves to the fact that it will NEVER be cold again. Indeed, even if it is cold, the winter is practically over as far as they are concerned.

Never mind that there is plenty of winter left, which could even morph into a colder than expected spring; Energy Bulls have largely panicked out of there positions recently. Most of the names that make up the OIH index are down approximately 12% over the last two weeks. Either the group is truly rolling over or a triple bottom is forming, setting up a great buying opportunity for the T. Boone Pickens type trader. We continue to believe that the energy sector has significant upside before the long awaited and lasting rollover actually materializes.

The market in general shot up in the morning offering hopes that 2006 has not really ended! Unfortunately for the Bulls the artificial bid that has been so prevalent in the market over the past couple of months due to performance anxiety was M.I.A. Therefore, once selling in the futures kicked in, it started to get out of control. Yes Bulls, all good things must come to an end…and your artificial bid, providing you safety, is kaput. This does not mean that all Bulls have received the message as is evident in the fact that Dip Buyers still showed up to save the day from what could have ended very ugly. However, today's extremely sharp reversal to the downside is foreshadowing of how quickly last years second half gains can evaporate.

If You Held a Taser to Our Head:
The game of the Stock Market never ends; as such there will be infinite rallies to capitalize on. Currently we are exercising patience rather than pay up for some of the exorbitant prices that reside in NASDAQ land. While we know all to well that, "The Market can stay irrational longer than an investor can stay solvent", we are also fully aware that one of our greatest strengths is our patience.

Looking forward to a prosperous 2007.

Market Still Needs a "Goodfella" Whack 12-20-06

2006-12-20T18:20:00.000-05:00

Good Evening.

The markets are exhibiting Holiday trading. As the trading ranks thin out, expect more random choppy action between now and New Years. The swings in individual stocks can be larger than usual this time of year so traders need to be careful with their position size and entry/exit points.

The Energy and Gold sectors have been particularly volatile over the past few sessions. The inventory numbers have largely favored the Energy Bulls however, the mild weather in the North East has been problematic. We continue to believe that when winter finally emerges, the tight supply and respectable job that OPEC has done recently in bringing down inventories should translate into higher energy prices. That will of course be the time that traders decide to focus on all of the "civil wars" taking place globally, further exasperating the up move in energy stocks.

We are becoming a little concerned with our Gold weightings as there seems to be early indications of technical damage. Therefore, we are likely to swap some of our Gold assets into the Oil complex over the next week or two. Mind you, we are still Bullish on Gold but are choosing to lighten up just a tad.

Should the price of crude break above $65 per barrel, the Stock Market will finally take notice and use that event as a catalyst for a much, much needed pullback. Did we say much…much? Nothing would be healthier for this market than a solid sell off to shake out all of the Bears that are now dressed in Bulls clothing.

The complacency in this market is still at historic highs. In fact, most traders have resigned themselves to the fact that any pullback is not likely to occur until sometime in January. This alone is worrisome and could create a potential swoon to close out 2006, as traders try to get a jump on one another. On the other hand, the performance anxiety Dip Buyers are worthy opponents and have proven their ability to defy logic many times over. Either way, add this to the many reasons of potential sharp volatility between now and New Years.

If You Held a Taser to Our Head:
Your friendly neighborhood Kcap Team is still heavily weighted in the Energy complex. We have various longs in Tech land as well, such as GOOG, ALU, CSCO, MSFT, AAPL, IBM, CTSH, YHOO, T, and ARMHY to name a few. We are aggressively hedging them out with various semiconductor shorts and ETF's.

The upside potential for the NADSAQ in 2007 is very exciting. However, the market still needs to get "WHACKED" from the likes of Joe Pesci before we aggressively commit our capital. Hey - oh, we're talking to you!

This may be our last post for 2006. We wish you all a Happy Holiday season and a prosperous 2007.

12-12-06 Fed "Let The Doves Fly"?

2006-12-12T17:15:00.000-05:00

Good Evening.

The Fed delivered a statement that was virtually word for word with its previous statement. The only differences were the insertion of the word "substantial" in reference to the cooling housing market. They also added a sentence describing the recent economic data as mixed. In essence, we believe that the Fed has given a signal to the Bond Market that it will be paying plenty of attention to the threat of recession versus what can be implied from previous Fed jawboning about inflation. Market participants have been living with a "Fed on hold" in conjunction with tough inflation talk. Suddenly, there is hope that the Fed Heads will be "chirping" with both "wings" (hands) up in the air.

This has moved the Fed into a slightly more Dovish posture. Bernanke's desire to be transparent to the Financial Markets may be setting up market participants for a cut in rates by June 2007. We believe that several months of setting the dovish stage through language and speeches would be the preferred method of choice for the Fed before it actually follows through with a rate cut. Furthermore, today's statement pointing to recent mixed economic data will give them further latitude in overlooking anything that might appear inflationary or too hot. All in all, we were happy to see this subtle shift which is a necessary ingredient for the Bulls in 2007.

Once the technology product cycle from Vista starts to kick in (slowly at first), we believe the earnings acceleration in Tech Land will become apparent around the same time the Fed actually cuts rates. Nothing would be more beautiful for the NASDAQ.

If You Hold a Taser to Our Head:
For the near future we are still playing it rather neutral with a lot of long positions in Oil and Gold and some shorts in technology stocks. Today's action in the markets can only be described as bothersome as the high beta MoMo names came under pressure not seen in several months. We are not saying that their drops were precipitous, just that the normal "buy the dip" mentality seems to be waning. We are still of the mindset that energy stocks will break out once they are through consolidating well off their lows. This will clearly send the profit protectors into action. We're still waiting for that big drop in the NAZZ before we commit aggressively to the long side.

Hope you traded well.

12-1-06 Energize!

2006-12-01T17:05:00.000-05:00

Good Evening.

Under the surface there is trouble brewing. The market is showing clear signs of sector rotation out of technology and into the energy complex. Our large Oil and Gold exposure has been a Godsend for this warn out Kcap Team. Ultimately we still expect that higher energy prices will take the NASDAQ down into a nasty correction. Whether this happens in December, remains to be seen as a battle is forming between Money Managers looking to buy the technology dips versus those that want to chase the not yet extended energy sector stocks. We will have to watch closely to see which group of performance anxiety Money Managers prevail. Should the energy Bulls trump the technology Dip buyers, the profit protectors will likely cause severe downward dislocations in the NASDAQ.

If You Held a Taser to Our Head:
Keep in mind that there is still a high probability that the NASDAQ will be choppy and range bound for the next few weeks. A series of lower highs and higher lows would not surprise us which could lead to a very interesting January '07. Should that pattern emerge in December '06 the market would be poised for REAL fireworks in one direction or the other. Our working thesis continues to be that the energy Bulls will prevail, creating the nasty correction that we have been waiting for over the past few months. A little Mideast tension over the coming weeks might prove colder for the technology Dip buyers than the cold front moving into the Northeast.

We are unlikely to be posting next week. Have a good weekend.

11-27-06 Bears Have Window of Opportunity.

2006-11-27T18:29:00.000-05:00

Good Evening.

After seeming like it never would, the market finally went down and down big! In fact, under the surface many of the high flying momentum favorites were crushed to the tune of 4% - 5%. Overall market breadth was atrocious and volume surged towards the end of the day qualifying today's action as a distribution day. Ironically, most participants especially Hedge Funds are quite relieved to see the smashing today. Every Hedge Fund seems to be viewing today's pullback as a long awaited opportunity to buy stocks at less extended prices. While this may turn out to be the right strategy for those underperforming Hedge Funds, the risks are quite high.

The problem that the current market faces, lies within the parabolic moves in the indexes. Simply put there are no good levels of support to stop the selling should it take on a life of its own. In addition, the Bears have been all but killed off over the past few months, leaving very few that are still short in the current environment. The lack of short sellers will exacerbate the decline due to the vacuum of natural bids that are usually in place for short covering purposes. Mix this with the newly minted anxious longs who would very much like to lock in profits and call it a year, and you have a recipe for a potential 10% decline in the NASDAQ.

Granted, your friendly neighborhood Kcap Team has been expecting a 10% decline for the past few months. In fact, a 10% decline from these levels would take the NASDAQ back to when we first started yammering about it…just to poor more salt in our eye. Regardless, today is a new day and we are only looking forward not backwards. The runaway market which has left Kcap and other Hedge Funds behind recently is not an excuse for emotionally charged investing with a lapse in judgment. We harbor many concerns about the ability of this market to continue without a large whack to the downside and today's sell-off opens a window of opportunity for the Bears.

However, should the market find support around these levels or slightly lower over the next few days, the stage will be set for another attempt to the upside to finish out the year. Should this happen, we will still consider the market in desperate need of a final washout to the downside before it commences the Large Cap multi-year Tech rally that we are excited about.

If You Held a Taser to Our Head:
Watch for signs of stability and leadership on any bounce that materializes over the next few days. A lower high after a bounce, being led by anything other than Tech would be foreshadowing more danger ahead. Furthermore, be aware that today's downside action came without any Macro or Corporate news of consequence. Do not be surprised if the market finds reasons to worry other than technical conditions in the near-term i.e. Geopolitical uncertainties and cold weather affecting the price of Oil. The dip buyers are still alive and need to be respected, but the Bears may have just woken up…too early to tell at this juncture.

Protect your capital.

Feeling like a Turkey!

2006-11-22T19:02:00.000-05:00

The Market continues to show resiliency, especially during this Thanksgiving week -- continuing to make your friendly neighborhood Kcap team as well as other long/short hedge funds feel like turkeys of the worst kind.

Most traders know that historically, Thanksgiving week has a stubborn bid underneath it. This is especially true when performance anxiety gets mixed into the equation as is the case with the current environment. More than any rally over the past six years, the current environment has created tremendous angst. Most long/short hedge funds have severely underperformed due to their hedging abilities as well as their active trading operations. You would be hard pressed to find a hedge fund that has not taken partial profits along the way – leaving them noticeably underinvested during the past few months. That, in combination with their short positions has created the most unwelcome rally that many can remember. Only the long only mutual funds, which have a mandate of being fully invested at all times, have prospered handsomely since July. However, they will be the same funds that will get whacked when the performance anxiety among the hedge funds runs its course. Naturally, the hedge funds that capitulate last will suffer the greatest humiliation of all … missing the rally and holding the bag.

The market is extremely overextended by any metric that professionals measure it by. In fact, the VIX is at a historic low, which indicates that complacency is at a historic high. Amazingly, performance anxiety has been able to trump these metrics for the time being. Unfortunately, the piper must be paid, and it is only a matter of time. Whether or not it happens in 2006 is too difficult to determine at this point. In fact, any pullback from here next week is likely to still be met with dip buyers. Furthermore, a potential pullback would actually increase the chances for a continuation rally into year-end. This of course would be negated should the pullback occur on unexpected geopolitical news and cold weather – which might lead the oil sector higher.

The larger market pullback -- that we have been unsuccessfully planning for -- is still out there, but clearly not making it easy for your friendly neighborhood Kcap team. We have been actively trading over the past few months with a short side bias. It does not take a rocket scientist to see that this approach has been an upstream battle. Other than our large gold & oil plays we have been unsuccessful in racking up meaningful performance over the past couple of months. Our frustration levels are high, but so is our confidence that we will be ultimately proven right. Our view remains that a major bull market is imminent in the NASDAQ large cap stocks – perhaps lasting two to three years. However, we have been anticipating that Mr. Market will offer one more correction before the real upward move can take hold. Unfortunately, we have been off with our timing, but our metrics still show that the real fireworks cannot take place without one more major disappointment for the bulls. Most professionals will tell you that the market has rarely launched a multi-year sustainable upward move with such weak internals, especially after it has rallied without a healthy correction for an extended period of time. The market has been exhibiting signs of exhaustion for quite a while – being propped up by underperforming money managers that are finally capitulating and joining the party.

If you held a Taser to our Head
Patience is a virtue and will reward participants with significantly better entry points. Traders need not feel left out especially if the NASDAQ is truly entering a multi-year bull phase.

Have a happy Thanksgiving – and always remember that market opportunities are infinite as long as you have capital to work with. Chasing extended stocks at these levels comes with tremendous risk to your capital.

Hope you traded well!

Neutrality. 11-13-06

2006-11-15T18:23:00.000-05:00

Good Evening

The Semiconductor Stocks finally joined the party when the SOX broke above its 200 DMA yesterday. Clearly the lack of participation from this group has been quite bothersome to your friendly neighborhood Kcap Team in embracing the overall two to three month rally. Simply put, we are not fans of a technology rally in which inventory issues plague the major chip companies of the world. Admittedly, other macro concerns as well as weak internals of the market have also kept us very much on the sidelines. However, the weak relative performance of Semi's has been a thorn in our horns.

Does the potential breakout of Semiconductors alleviate our fears, making Kcap unzip the Bear suit? Unfortunately not! We still believe this rally is being largely driven from performance anxiety and is likely to suffer a very bad ending. For those that have missed out or did not fully participate, there is a high probability that much better entry points exist in the not too distant future.

However, we have indeed covered most if not all of our Semiconductor shorts over the past few days due to the potential breakout in the SOX. INTC's +6% move over the past couple of days is noteworthy and shorting this group at this juncture is too painful for most, even Kcap. We have decided to position in a neutral stance while we wait for more evidence of a "blow off top" before we remount our shorts. In other words, we feel that it is way too late for fresh money buys but too painful to maintain large short exposure. Neutrality with a bias to the short side is our game plan for now.

Thankfully, we have been very successful at nailing the bottom of the Oil and Gold pullback. The upward moves in these names have been significant which has hedged us from being blown away from many of our short positions. Initially, we were able to cover our shorts on dips and then remount at higher prices. The rally has become so frantic lately, that the dips are now too shallow to play that game. Therefore, rather than shorting and covering higher, we find it more prudent to increase our cash exposure for the near-term.

If You Held a Taser To Our Head:
This market has been most unkind to anyone that has not been fully invested. The Bears have been all but killed off, which has created the conditions for the blow off top. Too hard to aggressively buy, too hard to aggressively short. Scaling out of longs into strength seems prudent.

Hope you traded well.

Double Trouble?

2006-11-10T18:20:00.000-05:00

The Market rallied yet again – stealing the ‘follow-through victory’ for the bears from yesterday’s nasty reversal to the downside. Those dip-buyers simply won’t quit and will not go away until they experience some tough failures. As long as they continue to be rewarded for their mindless dip-buying into the slightest intra-day support, they will hang around like a nasty cold in the winter for the bears. Speaking of cold, the warm weather in the East coupled with the EIA report (of possible reduced demand for energy) did an “E I E I O” to the energy bulls pounding the oil and gold related stocks and reversing yesterday’s nice gains. Most likely, this will present itself as a buying opportunity. However, today’s pullback in that complex was a good excuse for the general averages to stage today’s upside advance.

Did anyone notice how overall volume in the major averages was significantly weaker compared to yesterday when the market swooned? New highs in the NASDAQ were also severely lacking considering that the index itself is within a few points of its 5 ¾ year high. We might have the makings of a double top formation with today’s action resembling a ‘reflex bounce’. The bears need to be careful not to press too aggressively at this juncture but should be mindful that a double top may be forming.

If You Held A Taser To Our Head

Unfortunately for the bears, we have seen this setup numerous times over the past few months – only to have the market morph into something more enduring on the upside. Remember, the action may soon resemble a double top, but this market has taught us that anticipation can be rather unhealthy financially -- and, to massacre Johnny Cochran’s famous defense: 'if the double top doesn’t fit, the bears must quit'. That said, bears may choose to be a little more aggressive early next week hoping to catch complacent bulls off guard.

Hope you traded well – and have a good weekend!

Election Erection?

2006-11-07T19:13:00.000-05:00

The Market pushed higher into the election with the confidence of a sailor on shore leave with a wad of bills. Essentially, the market is acting as if it were completely immune to any bad news. All outcomes regarding the elections as well as Fed Policy, corporate earnings & geopolitical issues are only being considered as fuel for further upside. This is a one-way street!

The problem of course is that in the financial markets there is no such thing as a one-way street. Amazingly, market participants fail to recognize this fact at the end of every good run. They always believe that “this time is different”, and press their bets by overweighting positions and getting overly invested as well as adding high beta names to their portfolios. Unfortunately, the reversal in good fortune seems to come unexpectedly and inexplicably. Furthermore, all gains & then some are given back in a blink of an eye while market participants wonder what hit them. They usually find themselves caught with their pants down while measuring the drapes in their soon-to-be newly decorated room that they have planned for with their “handsome profits”. Not only does Mr. Market catch most players with their pants down but he administers a super wedgie in the process.

The elections will soon be over – or will they? The thought of possible recounts and lawsuits in the same vein as the 2000 election is enough to ruin any bullish party. Don’t kid yourself – there is a lot at stake and the numerous close races across the country will surely be challenged. Should this occur and control of the Congress and Senate not be determined over the next couple of days, the market will most likely suffer a major blow. In fact, even if the election process runs smoothly, the market is set up for a potentially large “sell the news” event. However, we still expect dip-buyers to show up in this case before the serious downside occurs.

If you held a Taser to our Head
Today’s upside action was on increased volume and positive breadth. Oil was down but only a negligible amount despite the threat of the potential Democratic sweep. Like many Hedge Funds, we have misjudged the relentless nature of this rally. We are frustrated for having missed a great trading opportunity, but still feel confident that lower prices for long term investments are inevitable in the not too distant future. We continue to carry an “unhealthy” hoard of cash and numerous short positions in semi-conductor land. Our large exposure in the Oil & Gold sector has been our saving grace – allowing us to participate in the upside a little. However, we have since cut back on our Gold plays looking to remount them on a pullback.

This is a tough business – the Money Management “thang” – but someone has to do it, and there are always better times

Hope you traded well!

The Bear That Cried Wolf? 10-30-06

2006-10-30T18:03:00.000-05:00

Good Evening.

There are definite signs of "crackage" developing in the market over the past few days. Don't get us wrong, we have not been fans of the internal makeup of this rally since it started two - three months ago. Clearly most other Hedge Funds have not been willing to fully embrace, if at all, the persistent uptrend that the market has been involved with since mid July. This very fact has kept too many people on the sidelines and too many Bears caught short. This is precisely the reason why the Market refuses to go down as Bears continue to short and cover and underinvested Bulls pounce on every shallow dip.

However, have you noticed that today's up move has come on decreasing volume? The breadth was also nothing to write home about. The Semiconductors led today's action, which seems more like a reflex bounce from Friday's clubbing in that complex. The fundamentals in Semi land are questionable at best and the lagging action of that index versus the rest of technology is an ominous sign. Indeed, the Semi's have bounced off of their 50 DMA recently but will be in serious jeopardy should the SOX revisit that level and fail. Therefore, all eyes will be on the SOX level 444 - 448 should it decline to that range in the near-term. A meaningful breach below 444 would likely send the Semiconductor Index down to the 400 level. This would pressure the NASDAQ, which is greatly lacking support due to its relentless run to the upper end of the range.

The problem with this scenario is that every trader and their brother seem to be watching the Semiconductors for such a breakdown. For this reason, the expected decline continues to be elusive. Traders keep shorting and covering the SOX hoping to prosper from the inevitable fall but without much success. The constant short covering continues to make this trade crowded providing an annoying bid which helps prop the overall Market as well. Ultimately the downside trade is likely to work out, once enough traders give up. The give up is likely to occur when another Index starts catching some upward momentum causing rotation into the new vehicle. Our opinion is that the Energy Complex is showing early signs of life which may be the vehicle of choice. We also like the Gold stocks which also seem to be showing early characteristics of a bottom. Both the Gold Mining and Energy stocks are doing better than their underlying commodities, which reinforces our belief that further upside is likely in those two groups.

If You Held a Taser to Our Head:
Today's upside action in the NASDAQ came on light volume which does not bode well for continuation. Furthermore, end of the month 'window dressing' is likely providing an additional artificial bid. A sharp correction is looming and is only a matter of time. All players are actually hoping for such an event but need to be careful for what they wish for. Oh, and one more thing, there is a small event just around the corner called the Mid-term Election. This is usually an excellent catalyst for a change in trend, especially if the Democrats sweep one or both houses. Whether or not the Market declines directly in front or just after the election is immaterial, due to the fact that the upside seems limited at this juncture and the downside is so severe.

Be careful out there.

10-26-06 " The Pain, the Pain" (Dr.Smith...from Lost in Space)

2006-10-26T19:11:00.000-04:00

The Market has been so persistent in its ramp that virtually no trader is happy at this point in time. The Bears have slit their wrists and most Bulls consider themselves underinvested since they likely took profits along the way. When a rally persists without the slightest of pullbacks, maximum frustration is created especially for Money Managers. Performance anxiety is a serious ailment and can only be remedied by chasing extended stocks or exercising extreme patience with an addition of prayers. Either way, both scenarios are unpleasant. The only well positioned traders are the fully invested immature bovines, usually of the cheerleading variety. Their day of pain will come too.

After the bell, MSFT delivered slightly better than expected earnings but disappointed investors with worse than expected guidance. However, all bad news is being forgiven in the current market environment and MSFT's bright future with its new Vista operating system should certainly be enough of an excuse to give this company a pass on its guidance. The question we must ask ourselves is whether or not the MSFT report coming on the exact day that the NASDAQ closed at a new multi year high, is a catalyst for a "sell the news" reaction in the broader indexes. Remember, even if we do get the long awaited pullback, dip buyers will not die easily. Alternatively, there is so little support underneath this market that a sharp collapse would also not surprise us. In other words, this is another game of musical chairs, though the DJ seems to have fallen asleep.

Other noteworthy companies that reported after the close were AKAM (basically inline with solid new orders), and NTGR (with better than expected results signaling strong consumer electronic sales). In addition, there were somewhat mixed results after hours for other names not mentioned here.

If You Held a Taser to Our Head:
Your friendly neighborhood Kcap Team is feeling MUCHO FRUSTRATION these days. We haven't lost any money with our overall Bearish posture, however we certainly aren't making a boatload either. We have clearly been off on our timing for a sharp correction and are constantly reassessing the analysis that brought us to our short term Bearish outlook. After much contemplation, we are still of the mindset that the recent rally is a FAKE-OUT, one that will end badly! There will still be plenty of time and opportunities to buy our favorite names for the long awaited Bull Market in the NASDAQ. Perhaps when this recent rally finally fails (clobbering everyone in this Solar System as well as Alpha Centauri), the disgust levels will be higher than Jimmy Hendrix and Gerry Garcia ever were. That would certainly be the perfect setup for the TRUE return of the NASDAQ.

Catch you on Monday.

Semiconductor Stocks Look Dangerous 10-24-06

2006-10-24T19:02:00.000-04:00

Good Evening.

Despite all of the praying and wishing from the Bears, the Market refuses to roll over. Most observers would say that this is a positive indication that bodes well for future strength. However, the market has marched higher with lousy internals in a very narrow manner. Largely a function of lower rates and energy prices, the rally is now also being held up by performance anxiety from lagging money managers.

Importantly, most Bears have now capitulated which eliminates the natural buyers underneath the market that would provide bids during short covering. This lack of natural buyers makes the current situation very vulnerable for a sharp correction. Evidence that we are late in the game is the extreme complacency on the Put/Call ratio and Vix. Furthermore, corporate bad news and geopolitical concerns continue to be ignored and is unfortunately mounting. The Technology sector has also decoupled from the Semiconductor stocks which is a phenomenon that usually self adjusts over time. The most likely scenario is that the NASDAQ will be dragged down by the Semiconductor complex. In our entire careers, we have yet to see a sustainable rally in technology land in which Semiconductors weren't participating.

The other forces that have driven this market such as the geopolitical environment, dovish Fed, and other attributes that we have listed in prior posts have indeed started their unwinding process with a negative bias. Does the market even care? No, but they will at some point in time and few players will have the ammunition to add buying support.

Clearly we have been too cautions and underestimated the stamina of the dip buyers over the past several weeks. However, the piper must be paid and usually the last remaining Bears that capitulate are the ones that have to shell out the moola. If you have underperformed during this run by being too bearish or underinvested as we have been; this is not the time to throw caution to the wind further compounding the error. Remember that the market is a never ending game of opportunities. Patience will prevail as long as coherent arguments can be made to justify your posture.

In the present situation, most participants agree that a sharp pullback is inevitable. In fact, the pullback might become a self fulfilling prophecy. Regardless, it is important not to bet too aggressively on the long side or the short side at this point in time. There will be plenty of opportunities to play the inevitable downside when it materializes. More importantly, we expect enormous opportunities to play the long side over the next couple of years, so please do not be in such a rush at this juncture. We believe it is okay to be slightly net short and add to those positions when it is clear that the market has cracked.

Remember, underperforming the averages is quite frustrating for many players and it leads to emotional decisions. Mature Money Managers and Individual Investors have learned to stay cool when everyone else seems to be cheerleading. Often the Bears who did not like the market when it was levitating on fumes prevail in their wisdom, but are slightly off on their timing, thus depriving them of any profits when the Market finally cracks to the downside. Remember stocks fall three times faster than they go up and underperformance can quickly be repaired with a few well placed shorts.

After the bell, ADI preannounced negative guidance. KLAC was essentially in line on revenues although they guided higher. The Semiconductor stocks are still suffering with inventory issues as most of them have had less than stellar reports including last nights TXN. Other companies that disappointed after today's close were GLW, CKFR, FLR, and FLEX. On the other hand, AMZN had a decent report which is already attracting the 'momo' players after hours. Whether or not AMZN will spill over into other stocks is in question, considering the host of other bad news reports and the big bad Fed tomorrow afternoon.

If You Held A Taser To Our Head:
The Semiconductor stocks are in a critical state. They have been severely lagging due to poor fundamentals. The SOX is in danger of breaking below the 442ish level which would provide a major technical breakdown of the group. Should that happen, we would not be surprised to see the SOX head abruptly lower by 8% - 10% most likely taking the NASDAQ with it. In addition, there seems to be a rotation taking place out of Semiconductors back into the Energy complex. A few more days of this action bodes very negative for the NASDAQ indeed. Perhaps tomorrow's Fed announcement will coincide at a critical moment for the Market…we shall see.

Still playing defense.

WHAT DO YOU MEAN AMD Had Pricing Pressure…GOSH????? 10-18-06

2006-10-18T18:10:00.000-04:00

Good Evening.

Apparently, the "sell the news" phenomenon is gaining some traction. When the DOW finally crossed over 12,000 it was quickly faded. Even the good news names, such as IBM, sold off throughout the day closing near their lows. In addition to this concerning aspect of today's market action, the SOX is showing severe cracks since recently touching its 200-DMA.

After the bell AMD is down sharply which should further pressure the Semiconductor complex tomorrow. Why anyone is so surprised that AMD is suffering due to lower prices from its war with INTC is beyond us. Funny thing about market participants, they have an uncanny ability to ignore the obvious for weeks and then suddenly act all at once. They are equally adept at reacting over and over again on the same news. This is a strange world indeed and human nature is an oddity!

EBAY has also reported decent numbers but offered disappointing guidance. Despite the stock looking higher after hours, we expect a fade to the downside over the next couple of days in its shares. Other disappointers were CTXS and JNPR's guidance, the former being down approximately 12% after hours. The star of the evening is AAPL…what… another shock! iMac sales were stronger than expected at 1.6million and iPod sales were at the high end of the range. However, their guidance was much lower than expected but AAPL seems to be getting a free pass from Wall St. on that issue. The stock is looking up nicely after hours but we are skeptical of its sustainability at this juncture. Participants need to remember that despite AAPL spreading so much love over the past year or so; eventually, Wall St. will abruptly turn its back on the relationship. This will happen at the slightest hint that AAPL may only remain a niche player. In other words, this is a great stock to own but only in small size due to the inevitable falling out of bed that can be expected (based on history). Remember, when AAPL falls out of bed it sounds like a piano hit the floor. Put that in your iPod!

If You Held a Taser to Our Head:
The Bulls were relieved that the CPI did not confirm yesterday's strong PPI advance. Unfortunately for them, the 0.2% reading on core CPI did not dismiss the prospect of inflation being an issue. While the Fed is likely to continue jawboning, the next hawkish economic report can yield fears of future rate hikes as opposed to the hope of rate cuts that have helped fuel the recent rally. Little by little, all of the "glass half full attributes" that the market has been celebrating over the past month or two are coming unglued, and hardly any equity players are noticing.

We will be posting again next week.

A Throw Back Rotation? 10/16/06

2006-10-16T17:10:00.000-04:00

The bears are in severe pain as the market marches higher, slow and steady without pause. Everyone knows that a pullback is immanent ( aaany day now, aaany day) but too many underinvested Bulls and capitulating Bears pounce on every darn dip. However, have you noticed that the XLE energy complex has been catching a bid lately despite oil still trading under 60? Maybe you noticed how the large caps today were finally pushing on a string while the small caps were starting to reemerge...Hmmm. Perhaps you also allowed yourself to notice the sox bumping into its 200 day moving average. Well, if you have missed these factoids ( is that a word?) then let this post call them to your attention.

Money seems to be rotating back to the small caps and the energy/gold complex in recent days. Perhaps this is due to desperate money managers looking for long side exposure in less extended sectors in order to attempt to play catch up with the major averages. Should that be the case, than the large cap sector will likely resume its leadership role after it experiences a sharp 3-4 week correction... From what level is the magic question, (a level that we have been clearly wrong with in our recent prediction of 2200ish. The market has even surpassed our most wild prediction of 2270).

Be aware that once the upside momentum gets going in beaten down energy stocks external circumstances can send the energy complex back to all time highs over the next few months. This would have a devastating effect on the 2007 outlook for the economy and force the financial markets to dramatically reconsider their view on future Fed policy...The largest driving force in the recent rally. Either way, a market correction from higher energy costs or worse yet a complete dislocation of the large cap bull thesis is likely waiting to bite the reluctant players who have recently joined the party. We repeat our recent warning.... The risks in this market can not be over stated at this juncture.

If You Held a Taser To Our Head:
Your friendly neighborhood Kcap team is contemplating whether or not the sox may experience a false break out rally above the 200 day moving average. This would be despite the throw back rotation into energy and small caps that seems to be gaining some traction. In light of this possibility, we have been busy covering our SMH shorts on dips and scaling back into them on strength. This process has been draining to say the least, but we continue to believe that most tech stocks will take one final visit near the lows before the REAL Bull market blasts off. Admittedly, we have been surprised by the relentless rally and how far it has gone. However, we are remaining patient with our strategy. Our portfolio is heavy in energy, small caps, gold, a smattering of beaten down optical plays, and earth moving equipment stocks. Oh, and don't forget plenty of cash....Sigh. We have sold many of our hard landing slow down stocks for some small profits. Hope you traded well.

10-10-06 This Bear is Bullish on the Revolution.

2006-10-10T20:09:00.000-04:00

Good Evening.

Throughout the 1970's and early 1980's, IBM was the dominant player in computer technology. Their architecture was based on mainframe technology that used a hierarchical approach. Corporations had no choice but to purchase very expensive, oversized mainframe computers that provided the brains on a token-ring network, sending data out to "dumb" terminals on each user's desktop. Applications were rigid and the end user had very little customized computing power at their disposal. Eventually this archaic model was replaced with a distributive architecture in which powerful desktop PC's acted as servers and could be connected to each other through Ethernet Networks, local area networks ( LAN), and eventually wide area networks ( WAN). This gave birth to the early internet super highway model.

Digital Equipment Corporation (DEC), was the original champion of the distributed architecture model that went head to head with the embedded hierarchical IBM method of computing. Ultimately, as telecommunication companies expanded their networks by allowing efficient robust digital communications on "POTS" (plain old telephone lines), the distributive methodology of computing became the more dominant model of which the world shares interconnectivity today. Broadband further enabled developers to create sophisticated applications that further enhanced the functionality and our dependence of computer technology on all of us. In essence, the old hierarchical top down (mainframe-dumb terminal) IBM model was largely replaced by peer to peer computing solutions in which the processing power was brought directly to the individual desk tops.

Peer to peer (PC) computing was indeed a revolution that took IBM by surprise with the speed of adaptation by society. After all, the IBM mainframe model was the standard, as IBM was also considered pound for pound, the best corporation and stock out there. Few would argue today that IBM has since become just another player in a universe of more innovative technology companies that have become household names in their own right. The lesson here is that, no methodology is so entrenched where it cannot be improved displacing the leader, either completely or significantly enough as to relegate the originator as antiquated.

In analyzing the GOOG/YouTube deal, your friendly neighborhood Kcap Team is further reminded as to why we are long term Bullish in Technology land. That's right, we said Bullish, despite all of the growling we have been doing over the past month. Remember, Bullishness and Bearishness is a function of time frame and we hold different views for numerous times ahead. Regular readers of Kcap will know that we fully expect the NASDAQ to be led by Large Cap Technology stocks of the 1999 variety over the next couple of years, eventually bringing the index very close to all time highs. However, a few short term obstacles remain in the way of the market that are of enough significance to be avoided, hence our near term Bearish outlook. We will not discuss those obstacles in this post since we have recently done so. We will however mention that if the explosion of a Nuclear weapon from North Korea (which did not have any negative effects on the stock market) doesn't signal complacency from Investors than what does? We had been recently writing about how the current issues will slowly flip to the dark side and they seem to be doing so. Unfortunately the stock market has yet to take notice.

Back to GOOG. The broadcast television industry, much like the music industry, and IBM of old, has had a nice monopoly for generations. They have force fed entertainment, told us what to think, provided the expertise, and all types of content that we live by. Their business model has had the benefit of monopoly power much like a Big Brother concept and they cleaned up with advertising dollars as we were spoon fed many poisons. Strategically placed or just plain out lucky individuals have gained celebrity status in our society as all knowing, full of wisdom, untouchable, reliable gurus. Never mind that many people we watch every day on T.V. don't know any more than you and I on numerous important issues that they speak so authoritatively on. Never mind that nepotism or the like has placed them in their role as "King Pin" monopolizing the media. We simply have no other convenient vehicle to obtain our virtual face to face information and our entertainment as easily as the broadcasters are able to deliver.

The "Googlenet" has provided a new model based on search that allows everyone to find anything about anything. Imagine, further enhancing search functionality with excellent video content on any subject that you choose to inquire about. Better yet, imagine a system developed in which every person in the world with a computer and built in video cam could be a sought out expert in their own right on whatever subject matter they excel at or hold major credentials in. They would be able to "put themselves out there", perhaps publicly ranked by users who have engaged them or from another respected organization and offer informative video content for applicable searches done by other end users. This content that they deliver could be boiler plate clips or further enhanced with scheduled live direct interaction between searcher and new found guru. The gurus (all of us) would be celebrities in our own right further allowing everyone the ability to profit handsomely from regularly offering expert advice or opinions. Enhanced or paid interactive searches could be charged to the end user through PayPal type technology and the revenue can be shared between the content provider (guru) and the facilitator of the exchange, namely GOOG in this example.

The GOOG guys are revolutionary in their thinking and have no doubt considered their ability to revolutionize how all society interacts with each other as far as content deliver versus the statusquoi television broadcast methodology. Buying YouTube for $1.65billion is a drop in the bucket when considering the dramatic changes that Google may invoke in how we all interact in this increasingly news worthy competitive world. Oh, and by the way, the traditional broadcasters who own today's content that they have been shoving down our throats all of these decades are in "deep doodoo". No content owner regardless of size and scope will be any match for the power of distributive video search at the individual level on any subject, at any time, from anybody, through search technology. Even customized peer to peer on demand entertainment will soon replace the broadcasted formula (same old same old) that we all endure for lack of better alternatives.

The horse power needed to provide these applications and infrastructure is available today and will certainly benefit companies such as Goog, MSFT, CSCO, AKAM, and other well financed technology companies that understand the most crucial element of all: large profits will not come to the companies who own the most content such as Disney or Time Warner, but instead to the best enablers of communication that facilitates the transfer of high quality interactive text and video content ( the content that resides in each and every one of us).

In the not too distant future, expect to see many people making a fine living in front of their computer or mobile device offering real-time advice or information to anyone in the world who asks for their expert experience. Remember, everybody is an expert in something and all of us can learn from anyone. Imagine easily being able to offer your own expert experience to anyone in the world by simply scheduling a certain amount of time during the day to field incoming inquiries or to reach out to others. Video applications allow for a warmer interaction then e-mail or instant messaging and would further the use of peer to peer electronic communication. Heck, you may even be able to video chat with a high profile elected government official for a couple of expensive minutes (that he or she may or may not charge) about what you think of a critical issue. We all have a lot to offer in some regard and future applications of GOOG/YouTube is only the beginning of tapping into further recognizing what each and every one of us has to offer. The days of the untouchable "Big Brother Broadcasters" are numbered. Interactive video communication with the ability to search for relevant information and expertise is the revolution.

If You Held a Taser to Our Head:
Having said all of the above, we must unfortunately put our Bear suit back on and remind you of the short-term risks that are inherent in the U.S. Financial Markets. Longer term players may ask why we would be concerned at all about short term volatility especially considering our mega Bullish views explained above. Unfortunately, money managers can have clients remove their assets at any time, managers are compelled to eliminate short-term volatility as much as possible. Therefore, since the recent rally in the markets seems to be commencing on performance anxiety alone we are concerned as we head into the heart of earnings season with an economy that is going through a transformation.

After the bell, AA has further added to the beleaguered MU, NSM, MRVL recent reports by offering worse than expected "slow down news" of their own. Expect more of this in the next few weeks in the guidance from most companies whether or not they meet current quarters earnings. Additionally, notice how the wrong sectors from earlier in the year are starting to attract bottom fishers (which certainly isn't too promising at this juncture). Specifically the Housing Sector, Oil Stocks and Gold are showing signs of improvement that might steal the show yet again from the recent large cap winners over the past month. Hence, we are building back more exposure into the beleaguered Energy and Gold sectors and continue to short Semiconductors whenever they lift their head.

This will be our last post until early next week.

Worry, but be happy!