Hedge Funds Have Ruined This Game. 8-2-06

Good Evening.

We're back in the saddle and thoroughly enjoying our new office environment…thank you very much. Our only complaint is that the air conditioning system doesn't seem to be performing up to speed. Even with this atrocious HOT weather, the office should be able to cool down to something south of 80degrees. Oh well, at least something is rising.

The market continues to frustrate all participants with its complete lack of follow through in both directions. More importantly there are numerous land mines out there for anyone who dares to hold heavy positions in any stocks that report news or earnings. When numerous stocks fall 20% - 30% overnight like this market has been producing, nobody can argue with the fact that sentiment remains extremely Bearish. The shorts think nothing of piling on and the longs sell their positions regardless of price faster than Mel Gibson would avoid a Bar Mitzvah. Hell…he probably even regrets his circumcision, if he's even wearing a hat.

The good thing about the market lately has been that the downside is slightly more contained when it materializes. Yesterdays drubbing of the market was softened by a late afternoon recovery. Furthermore, today's upside action reduced the pain even further for the most recently trapped Bulls. The likely reason for the slightly less volatile market is the anticipation of the Fed on August 8th. Many market participants are still very untrusting of the market and have huge cash hoards on the sidelines dripping into the market ever so selectively. Therefore, some upside action immediately before or just after the Fed is still likely due to the level of underinvested traders out there. Be aware that history shows temporary peaks in the market are established when the Fed finally ends a rate hike campaign. Whether or not that peak happens immediately after the announcement is difficult to game at this point in time due to the tremendous sideline cash that exists.

The largest problem that this market has been experiencing for the past couple of years is the creation of the "me too" trader. Nowadays fundamentals, technical analysis and even psychology seems to be holding less weight as it is being replaced with an insatiable appetite from traders to simply magnify the latest price tick on the charts. Every move seems to attract thousands of hedge funds piling on as they dramatically reverse their posture in a heartbeat. Without the inclusion of sufficient individual investors in the market, the thousands of amateur hedge funds are playing footsy with each other throughout the day creating tremendous frustration for all. There simply is no way for the market to have material follow-through as long as the trading is completely dominated by hedge funds absurdly disloyal to any viewpoint. We will need to see the actual improved fundamentals from bellwether technology names such as MSFT, to bring back the individual investor. Don't fret, those days are a' comin'.

If You Held a Taser to Our Head:
The market received a little cheer from ADBE reaffirming guidance and TWX and PG's good earnings also lent a helping hand. Even the discredited ADP report of only 99,000 new jobs added for July, helped provide a little more bid in today's action. After the bell today, SBUX is getting hit approximately 10% with a so-so report. There are more Starbucks stores than there are sand grains on the beach, so why anyone believes that this company can keep up its torrid growth rate is beyond us. We will be looking to build a short position in SBUX over time but ever so slowly.

Hope you traded well.

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