Nimble With Bearish Bias

Good Evening

The NASDAQ closed down 1% on the heels of Intel (INTC) and Yahoo! (YHOO), both of which were down approximately 12%. Have you ever noticed that when a stock is taken behind the woodshed to be shot, it gets a 12% haircut…regardless of the market cap, industry, reason, valuation, CEO's Grandmother's bra size, etc? What is the reason for this ubiquitous action you ask? Perhaps 12% is just slightly uglier than 10% since we all tend to think in increments of 10, and the market always likes to be a little uglier than seems reasonable (just thinking out loud).

Small Caps outperformed today which should be no surprise considering that the carnage came from some of the favorite large caps. Strength in the Small Cap sector helped the NASDAQ recover a chunk of it's loses, having the Bulls proudly proclaim that the decline was orderly and without panic. Why they take such comfort in an orderly decline knowing that the sloppy decline is still to come befuddles us.

After the bell, Advanced Micro Devices (AMD) reported a blow away quarter which apparently is reason enough to suck all remaining money on the planet Earth into it's shares. AMD has never been a company that was able to sustain a lead over Intel (INTC) when the big boy was bruised. A pricing war is likely to ensue and our bets would clearly favor INTC with their deeper pockets to regain lost market share by mid 2006. Furthermore, INTC is always slightly behind the product development cycle which offers these momentary reversals of fortunes between the two names.

Most importantly we were pleased to see that at least somebody was selling microprocessor chips to aid in our overall bullish thesis. Incidentally we expect a similar market share story when Google (GOOG) yet again shows up YHOO. Ultimately we believe YHOO will humble all of the Googooglians by year end.

Apple (AAPL) and EBay (EBAY) both reported strong quarters after the bell but have disappointed the street on guidance, AAPL more so. Steve Jobs notoriously cares very little about Wall St.'s erratic behavior and it would not be surprising for him to have dramatically low balled. Nonetheless the stock is up huge over the past year and has no tolerance for anything less than perfection. In other words a buying opportunity is emerging yet again in AAPL after it gets bruised for a little while.

If You Held a Taser To Our Head:
Your friendly neighborhood Kcap team was very busy today covering and re-shorting various positions and ETF's. Despite the averages being substantially down we were pleased to have turned in positive performance. We are still expecting a sloppy drop that will take the market to new lows for 2006.

At this juncture we are actively shifting our posture from net long 15% to net long 60% in order to capture some of this volatility. However our stops are tight as we do not want to get caught in the "sloppy joe" that we are predicting. You may call us nimble with a short-term Bearish bias but as Redd Foxx said "you doesn't has to call me Johnson".

Hope you did well. See you tomorrow.

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