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Hoop Dreams

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It's ok to take your shot as long as someone is there to catch the rebound!

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"I've seen you guys can shoot but there's more to the game than shooting. There's fundamentals and defense."

-Coach Norman Dale, Hoosiers

Good morning and welcome back to the swarming. The green seed is planted and Snapper is itchin' as Boo starts to twitch as his brethren all ditch him. "Forget the inflation and technical breaks, " grumbled the bear after several head fakes, "traders all know the considerable stakes and they're resolute to do what it takes!" Will the giddy bull fun run through the last gun or does that kind of talk mean the fun's almost done? Power it up and get ready to thrill as we roll up our sleeves for a run in the 'Ville!

I hooped it up on Friday night with several friends who are scattered around the Street. These particular traders are fairly big hitters and while I'm not sure of the exact numbers, I would venture to guess that they control a few billion between them. What struck me--other than my bad back and pained knees--is the conversation I picked up as we warmed our old bodies up. "I bought stuff that I would never normally buy (in the rally)" one said. "Rent-a-stock!" replied the other as he launched a three. "I punted my exposure into the bell but I'll buy it back Monday if I have to!"

And so it is--hedge fund hot potato circa 2004 is officially upon us. I heard more than one comparison to 1999 during the game as the great race to get paid is in motion. This hasn't been a particularly stellar year for most funds but they're bettin' that it ain't over till it's over. As such, they're buying the high beta names and looking for as much bang as one can possibly get for a buck. That's why you're seeing the semis and nets outperforming and that's why they're making one last stand.

There is some anecdotal evidence that supports this self-fulfilling prophecy. The Russell 2000 has broken out above 566 (downtrend line comes into play at 578), the NDX looks like it wants to offer no more tears (inverse dandruff?), the S&P (up 6% in four weeks) has based above the 200-day moving average, trannies are flyin' at a 52-week high, the macro environment gained incremental clarity (election and crude), there hasn't been any motivation on the sell-side and, perhaps most important, performance anxiety is a powerful emotion (extended can become more extended).

The risks--as much as nobody wants to hear 'em--remain lurking in the dark alleys of Red Dye Junction. Technology fundamentals remain back-end loaded and channel checks indicate that business has yet to improve. That may not matter (the bulls will offer that the late summer bummer reflected that) but ignoring it can be hazardous to your financial health. Further, and despite the fact that nobody wants to discuss this, a dose of risk premium should be factored into current levels as we edge closer to the November election. Some would offer that it already is but I have a tough time seeing that with volatility measures (VXO) at eight year lows.

We power up this morning's pup to find Asia and Europe swimmin' in green seas, the greenback marginally higher, the metals off a bit and the stateside futures pointing higher. Broadcom (BRCM:NASD) pulled a "what? WHAT?" last night by lowering revenue guidance on a Sunday so watch the collective reaction as a semi--and tech--tell. Also monitor XBD 130ish as the brokers should offer clues on whether the old school will play catch-up (and test '04 highs) or roll over and play dread.

Good luck today.

R.P.

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