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Desert Swarm


There's no place like home!


Good morning and welcome back to the future. As we shake off the holiday cheer, it's already time to start the new year. While last week's freak was a relative snoozer on Wall Street, the critters were actively embracing a spiritual retreat in Arizona. It's been a few years since they last looked within but if their soul is a muscle, the desert air was the deep tissue massage they collectively craved. This morning, refreshed and ready for an exciting 2005, they gathered at Ollie's to catch up and dial in. The chatter went a bit like this:

Hoofy: All in all, I'll take it. After the sharp rally of 2003, plenty of pundits felt that last year would take us back to life, back to the reality of post-bubble trouble. But despite dire warnings of debt, the global dollar shun and lopsided lazy sentiment, the Minx tacked on single digit gains. If that was to be the "half step back," I've got a lot to look forward to!

Boo: (pawing through his date book) calendar says it's 2005 but it sure feels like it's 2004! Everywhere I turn, I hear words like "seasonality" and "inflows" dominating the trading conversation. So while it's officially January, the Ice Capades still seems apt if you choose to adapt.

Snapper: With all due respect, brother bear, that type of rationalization smacks of redundancy. I'm not sure if you heard from Aunt Fannie (FNM:NYSE) while you were away but the "eyes" still seem to have it. Despite "material weaknesses" found by their auditor (who were then relieved of their duties, thank you), a fresh spate of supply was gobbled up by eager beavers. That was five beans, Boo--$5 billion--and the bulls are still sittin' at the table!

Hoofy: (burps) You watch Fannie is a microcosm for the entire tape but you only wanna discuss it when it's flyin' through Red Dye? Personally, I think that using one stock as an equity harbinger is inherently flawed but I respect your analogy. I would add, however, that the uptick in M&A and the continuance of corporate buy backs support the bovine thesis. So as "Enronesque" as you think Fannie is, there is a broader backdrop in play.

Sammy: The "yield starvation" has been an upside draw that kicked in on the back nine of '04. That was Elmer's initial motivation when he lowered rates to nothingness and squeezed grandma back into the market. The supply of greenbacks didn't hurt either, of course, and the risk to that incremental demand has yet to manifest as some believe it will (present company included). Either way, capital markets "trade well" and that must be factored into the mix.

Daisy: (tanned nicely) I still sense that folks miss opportunities by viewing the Minx as a single beast. Look at the polarity of the individual sectors last year--if you were luggin' the chips and drugs, 2004 wasn't a fun ride. Conversely, if you were weighted to metals and energy, 2004 made for some silk milk. Investors should stay particularly alert for rotation as a major theme in the year ahead. If monolithic movements are the first phase of market migration, industry specific opportunities dominate the second stage. And then, potentially, specific situations could be the last stop before abject apathy.

Snapper: Perhaps, but the purpose of the journey must remain the journey itself. The first thing that every Minyan should do is define a time horizon for their risk. Interpretation and assimilation are subjective and the same elements could paint different strokes for different folks. For my part, and as I'm looking at the near-term, I'm eyeing BKX 104ish as an important guide. The financials are still the key to the critter vault and this level should help us as we truck through the muck.

Sammy: Well, conventional wisdom dictates that portfolio managers will open up their stance to start the year. Without the pressure of quarterly (year-end) letters hanging over their heads, it's intuitive that they'll afford their risk profiles a bit more latitude. Keep an eye on the internets (Goldman push), watch the breadth (best intraday tell) and make sure you give Collin's trading radar a good read. It's the best playbook on the Street.

The crowd around Ollie's slowly thinned and the critters knew that it was time to go. With the holidays in the rear-view and a new year ready to rock, there was a quiet confidence at the table. There is reason for optimism (inflows, corporate action), cause for pause (ursine credibility?) and lurking unknowns. Discipline and patience remain necessary components of any successful trading strategy so take a deep breadth, visualize a prosperous year and let's get this party started right!

Good luck today.


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