Bernanke on Training Wheels. 5-1-06

Good Evening.

The market was going along minding its business, boring the hell out of everyone when suddenly at 3:15pm Maria Bartiromo from CNBC dropped what was perceived to be a BOMB SHELL. While interviewing Mike Moskow, an FOMC member who is considered as being of the more hawkish variety at the Fed, she casually mentioned her conversation with Ben Bernanke at the Correspondents dinner. Apparently during that conversation Big Ben took the opportunity to express bewilderment and concern over the markets reaction to his statements to congress last week. Simply put, Bernanke wanted to be perceived as flexible regarding rates but that darn market painted him as a dove yet again.

Now don't get us wrong, we appreciate the arsenal of jaw-boning that the Fed uses from time to time in order to disseminate information to the markets. In fact, using Maria Bartiromo as a conduit seemed like an efficient thing to do. However, what Big Ben failed to realize was that timing is everything and that Maria's choice of time to deliver this tidbit of information couldn't have been worse. The Bears were already preparing their daily raid at 3:15pm when the news broke and were handed ammunition to really wreck havoc. Remember, its not so much that the market dropped like a stone between 3:15pm and 4:00pm but rather the mood may have morphed into something a little uglier than existed at 3:14pm today. The larger concern is that the downside action may accelerate tomorrow. Perhaps Bernanke will learn the Greenspan lesson of how to say a lot of nothing especially to reporters. Transparency and good timing may be mutually exclusive, especially when the messenger has her own agenda.

We are now faced with a market that is intent on scaring the bejesus (is that a real word?) out of any late long entries in the past few weeks. It is critical that the NASDAQ holds the 2280 level over the near term in order to avoid this shakeout from turning into something more enduring to the downside. The good news is that the market has currently panicked down to solid support and is somewhat oversold. Therefore, the makings of a very attractive bounce are in play. However, the only guarantees in life are death, taxes, and that Anna Nicole Smith will continue being a very rich "air" (intentionally spelled wrong), so we need to be mindful that support levels can fail and this market has possibly turned very dangerous.

If You Held a Taser to Our Head:
Your friendly neighborhood Kcap Team is longer than comfort allows so we took the opportunity to slightly lighten our exposure. We still hold heavy concentration in Large Cap Technology and have even started accumulating some of the Banks, specifically C, JPM, and CBH. This particular shakeout that has occurred over the past week or so has been unpleasant to say the least. Many hedge funds have found themselves net long and wrong and are finally starting to puke in force! While this is setting the stage for the important bounce, we do not deny the obvious pain that the market is dishing out.

Hope you traded well. We'll see you on Wednesday.

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