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Animal Farm


Be the ball!


"See if you can guess what I am now. I'm a zit. Get it?"

--John "Bluto" Blutarsky

Good morning and welcome back to the twisty track. It's been a long week in the city of critters with fastballs and curves being thrown at the hitters. The games have been long and the stakes uber-high as the bears serve it up and the bovine just buy. "Keep throwing the heat," said Boo to the Street as he urges his team to step up and compete, "I know you're all beat from a week on your feet but the fry in Red Dye is gonna be sweet!" Can the bear lend a scare to this minxy affair or will he soon find that his cupboard is bare? We'll know soon enough as we take a peek and ready ourselves for a new Friday freak!

It seems like forever ago that the S&P was poised to break out to new '04 highs. And traders, straddlin' the flat line of return, were obliged to anticipate that acne and position proactively. Three weeks later, with Spitzer salvos and fundamental fumbles surrounding us, the mood in the hood has become a tad tense. And lotsa funds, loaded to the gills with anticipatory inventory, are being forced to rethink whether they're willing to place their bets on Hoofy's heroes.

An interesting dynamic has begun to emerge as the bovine weigh their latest splurge. With sector specific bombshells putting hair on entire packs of dogs, the spectrum of choice has narrowed for the long only crowd. Last night, when splurging with Succo at Mr. Chow, we were musing about the incessant upside thrusts that are the internet and transport spaces. "It's all about money flows," I offered in between bites of chicken satay, "and these are the sectors of choice for the mutual fund community. With issues in a host of industries, flows are being squeezed into the few sectors that are considered safe. Kinda like a zit!"

The analogy is somewhat nasty (and it's certainly not dinner conversation) but it may be quite apt. If you're a fund manager, regulatory malfeasance and fundamental concerns are eliminating investment options. That's not to say that these sectors can't or won't snap back (Snapper likes fear) but we've been watching funds hide in the internet space for some time. I'm sure that there's a fundamental rationalization (growth) but a more realistic reasoning is that they're looking to bang their investment buck with hopes that it makes up for losses in other arenas.

This isn't an epiphany on my part (this kind of musical chairs has been going on for a long time) but I wanted to follow up on the awesome exchange we shared on yesterday afternoon's Buzz. In the competitive world of money management, relative performance trumps absolute performance--as long as you beat your benchmark, you're job is prolly safe. Therein lies the dichotomy between the risk profiles that govern OPM (other people's moneys) and those that the managers likely adhere to themselves. That's not always the case (many hedge funds managers trade their own coin) but it's an all too familiar commonality.

I'll finish up this missive by reminding ye faithful of the importance of commandment #1. We must always respect the price action but we can never defer to it. It's easy to get lured by the sirens of Matador City, particularly when we see stocks running to the upside. But if jiggy price action is your sole reason for participation, the only way you'll lose your catalyst is after bids are whacked. It all comes down to risk management, my friends, and the onus is ultimately on you to police your portfolio.

Good luck today.

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