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Year-end Flapjacks

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Follow which leader?

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Good morning and welcome back to the white rubber shack. There's a lot going on with eight days to go and the critters prepare for the end-of-year show. With a chill in the air and pressure inside, the rubber and road are set to collide. As I know we're all slammed with loose ends and holiday trends, I skipped my morning prose and instead chose to join the critters for their weekly nosh. For the last time in 2005, the fab five gathered at Ollie's for schnitzel, shmear, hugs and handshakes. The conversation went a bit like this:

Sammy: Raise your paw if you knew that the NDX and S&P are at the exact same levels of a month ago. That pretty much sums up the "more motion than movement" vibe that Toddo's been espousing on the Buzz. I would also note the "S's over N's" trend that flies in the face of performance anxiety and the relative traction in traditional hiding spots (consumers and drugs).

Daisy: Yeah, there's money to be made in Rotation Station if you're nimble and disciplined. Alotta traders "grew up" trading SPY and QQQQ but they're crowded and compressed. With market volatility muted, that game is old and we gotta adapt if we hope to survive. Sector bets have offered juicy two-sided opportunities--and they will continue to do so in 2006--but we'll likely need to identify specific situations if we really wanna dabble in double digits.

Hoofy: It would be great if the 'Ville could toss out more actionable ideas. I mean, let's face it, alotta folks measure our merit by how much money they make.

Toddo: I know--no matter how true we stay to our roots of forthright fiscal literacy, the mainstream mindset is conditioned to want to know two things: when do I buy and where do I sell? It's an ingrained process for the pros and a defense mechanism for others who don't fully understand the minxy mechanism. Still, we've built an incredible community that provokes thought, provides insight and sifts through the sizable schvitz that surrounds us daily. If we do our jobs, folks should have ample information with which to base intelligent decisions.

Boo: But isn't there a middle ground? Isn't there a way to offer ideas and examples of what you guys are thinking? I mean, others are doing it, some quite recklessly, so I'd love to know what the professors are thinking more often.

Toddo: When we launched the 'Ville, I may have over-compensated a bit on the "no advice" mantra because I needed Minyans to know that we're not here to tell you what to do. Anyone who claims to be able to do that without knowing your time horizon or risk appetite is likely more focused on ratings or commissions than your nest egg. But yes, Boo, there's a middle ground that you'll see explored when we launch the new digs in January. There is a learning curve on both sides and you'll see that maturity manifest in 2006.

Sammy: What are you thinking into year-end?

Toddo: Well, you're talking eight sessions that will be dominated by emotion, anxiety and thinning ranks (especially next week). So, truth be told, it's a toss-up in terms of which camp will win out. I've tried to offer guidelines that I'm watching, frameworks such as BKX 96, XBD 200, SOX 485 and S&P 1270. And I've been closely monitoring for helpful hints, such as market internals (they were the red flag yesterday), the "island gap" bullish reversal in pharma, the nosty trap door in Google and the two-sided situation in the metals.

Hoofy: But what's your gut cookie?

Toddo: I'm prolly more open-minded than many think (first half '06) but the action of late, coupled with uber-low vols and great expectations, has me sitting in the year-end cheap seats rather than tossing blind coins. I don't see the market breaking out to the upside without leadership from the financials and semis. And, gun to head, I think we're in the early innings of a seismic shift on that front. I continue to feel that energy and metals will be chieftains of the future but I was admittedly more comfortable with that "call" before it was on everyone's radars. Still, from a relative weighting perspective, they both have room to run.

Boo: What about psychology patience? How long will the year-end rally crowd hang around? With eight sessions left and portfolio managers eyeing their #2's, I gotta think folks are getting antsy. And if a bottleneck occurs, it could make the MTA strike look like a walk in the park.

Sammy: I will simply remind Minyans to make sure that their risk profile and time horizon are in synch. Jeff "as good as it gets" Saut of Raymond James quoted Benjamin Graham in his weekly missive yesterday and it's sage advice to end this opening bent. And I quote:

"What do we mean by 'investor'? Throughout this book the term will be used in contradiction to 'speculator.' As far back as 1934, in our textbook 'Security Analysis,' we attempted a precise formulation of the difference between the two, as follows: 'An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.'"

Good luck today.


R.P.

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