"HOW TO" Be a good client and prosper 01/02/08

There are plenty of books and articles written over the years on what criteria investors should use when choosing a money manager. Analyzing the various money management styles and how they match up to the client’s objectives as well as personality have all been discussed in depth. However, we cannot recall ever reading a “how to” book on what it takes to be a good client once a money manager has been selected. Believe it or not, the responsibility for failed relationships between the money manager and the clients is shared by both parties. This is especially true for clients that retain a money manager in a Separate Account Management structure. Why Separate Account Management? The answer is that this particular style offers the unique advantage of full transparency and full access to the money management team for the client. Therefore, the lines of communication are open creating the ideal situation for a true team approach between the client and the money manager.

The client shares in the responsibility for the short, intermediate, and long-term success of the investment program. Clients that simply delegate their funds to a chosen money manager without understanding their responsibilities in the process usually bail at the first sign of underperformance. Unfortunately, their timing is usually horrendous, and they are notorious for being contrarian indicators. Furthermore, they usually add to their misery by “Performance Chasing” the next hot money manager of the quarter.

Your friendly neighborhood Kcap team has composed a list that all clients should abide by if they hope to have a prosperous long-term relationship after they “carefully” select a money management team:

· All clients need to be realistic regarding volatility. Living with and embracing short and intermediate term volatility is almost always a necessary component to achieve significant out performance over the long term. Clients who unrealistically demand low volatility yet expect high returns are sure to be disappointed and ultimately will switch to a new money manager, but will never be satisfied in their utopian quest. In other words, instead of abhorring volatility, clients should accept short-term fluctuations and even embrace them as opportunities for enhanced returns. Clients who are striving for significant out performance need to accept the fact that some of their statements will be on the dark side. Even the best money managers in the world have a cold spell. Clients need to consciously remember that the long-term trajectory of the account should far out-way the short-term gyrations.

· Clients that understand the long-term strategy that their money manager uses need to also be flexible when the manager deviates for short-term opportunities. We are not talking about style drift, but instead allowing the manager to operate in several time frames i.e. They can be long term bullish, yet remain short-term bearish. Good money management teams need the ability to carry significant cash or even short positions for an extended period of time while waiting for the proper setup to implement their longer term bullish strategy. Clients need to allow the money manager this flexibility with full understanding that the short-term plan may turn out to be incorrect.


· The media, clients, and virtually anyone who invest in the financial markets are obsessed with artificial dates used to measure the performance of investment portfolios. Quarterly ends, and especially the all mighty December 31st are used by clients like a gun to the head of each and every money manager. This has the undesirable effect of forcing money managers to either take outsized risks or avoid opportunistic risks when those critical dates are drawing near. For heaven’s sake, what difference does it make on what the value of your account is on exactly December 31st at 4 p.m. versus January 15th at 4 p.m.? Should you really be making decisions about your money manager based on one single mark in time? Unfortunately most people do, which has a huge negative effect on the performance that most money managers deliver to their clients. Ironically, money managers that do not live and die by theses artificial dates tend to deliver far superior long-term performance than their peers who are enslaved to this ridiculous phenomenon.

· Be a partner in the overall strategy with your money manager. This means that the client should take the opportunity to understand the short, intermediate, and long term views of the money manager. A good money manager can explain in uncomplicated terms the investment strategy for various time frames. The client will have ample information to assess the merits of the investment plan and will therefore be more comfortable with the outcome as long as the strategy is being properly adhered to (allowing for flexibility). Clients that do not want to know how the money manager will achieve great returns but only care about watching the performance will surely bail at the first sign of volatility. In other words, a client as a partner in the plan will have much better staying power as the money manager works the plan. Obviously the client has to believe that the money manager still possesses the intelligence and capability to deliver excellent long term results in the first place.


· One of the most powerful tools in investing is dollar cost averaging. Clients would benefit tremendously by providing their money manager a steady diet of fresh cash that can be utilized especially during volatile markets. There is nothing more beneficial to long-term performance then adding to quality existing positions when they are down. Ironically, clients too often withdraw some or all funds from their money manager at precisely the worst point in time which dramatically lowers long-term performance. In fact, some clients treat money managers as an ATM, which is a tremendous drain on the performance of an equity portfolio. Statistically, it has been proven that clients who add money to quality money managers during times of severe volatility dramatically outperform those that do either nothing or withdraw some of their funds.

· All money managers charge their clients fees based on numerous factors. When comparing the fee schedule between two different money managers, the client should consider factors such as risk management control, access to the money manager, lockup periods, termination charges, front end loads, level of transparency and target returns.. There are other more obvious considerations such as past performance but the above list is too often ignored.


· Clients should not compare money managers with different investment styles. All styles go in and out of favor, which will affect short to intermediate term performance. However, most quality money managers can offer solid long-term performance despite the temporary headwinds of their particular style. Clients that jump from style to style are likely to chase their own tails. Clients should also be aware not to get lured by the “next best thing”. Too often they think someone else has invented a better bread box when in fact staying with the tried and true methodology is the best way to achieve solid long term performance.

· Clients should expect hot and cold streaks from their money manager even when their style is in favor. The best money manager will eventually have a cold hand or fall into a hole that they will need to dig out from. Unfortunately, clients want to only be with managers that have a “hot hand”. This is another large mistake which causes them to chase their tail as they rotate from money manager to money manager.


· Clients should show a sense of loyalty and offer encouragement to their money manager. The money management business can be very cold. Clients that show loyalty, long term commitment and encouragement during those stressful times help the money manager to remain confident and clearheaded. This will help the money manager to avoid taking unnecessary risks but rather provide the confidence to take well calculated risks. In other words, a book of clients that know how to act maturely during stressful times is extremely important to the money manager to deliver successful performance. Experienced money managers should cut lose high maintenance clients that provide negative energy during times of underperformance. In other words, everyone benefits when the whiners and complainers are eliminated (good bye and good riddance).

· Clients need to fully understand the differences between momentum and contrarian investing. Furthermore, clients need to commit to the pros and cons inherent in whatever particular style is being used. For example; there are specific negatives inherent to contrarian investing such as enduring short-intermediate term underperformance. Tremendous patience is a must. On the other hand there are significant negatives to momentum investing as well; such as the potential for sharp volatility in the value of the portfolio. Clients that understand the downside to the style that is being utilized will be much more at ease through the long term investment plan.


· Clients would be far better off concentrating solely on absolute performance as opposed to relative performance verses an arbitrary index such as the S&P 500. Trying to always stay close to the relative performance of an index is an excellent recipe for mediocrity. Most of the time, superior long-term results are delivered by ignoring the averages. Short or even intermediate term underperformance is usually a necessary evil in the quest for superior long term performance as has been mentioned earlier. This is especially true with contrarian style investing.

· Clients should not pay any attention to the media cheer leaders or dooms dyers. Those entities always live in the short-term, and only know how to extrapolate current market conditions into the long term. They are only after ratings and do an excellent job of proving to be contrarian indicators for savvy money managers. DO NOT GET SWAYED BY THEIR AUTHORITATIVE EXUBERANCE!


· Clients need to understand the strengths and weaknesses of Wall Street analysts. Simply put, most if not all are nothing more than glorified accountants that are completely useless with their stock recommendations. They have virtually no feel for the psychology of the market which is 90% of the game. Timing is everything with stock selection and they have NONE! However, they do provide some research for smart money managers to use in making their OWN decisions about IF and WHEN a stock should be bought or sold.

· Clients should never micromanage their money managers. Active money management entails buying and selling many stocks often resulting in losses. A client that sees many losing transactions should not be concerned as this is often a case of good risk management techniques being deployed by the money manager such as tight stops, etc. Money managers often deliver strong overall performance despite taking many realized losses in the account. Realized losses also help with tax planning.


· Clients need to stop having aversions to large quantities of cash that the money manager might be carrying for extended periods of time. The money manager is responsible for long-term performance, and if he feels carrying significant cash is the appropriate thing to do than the client needs to respect that decision. Fees should be unaffected by the amount and length of time that high cash levels remain in the portfolio.

The above list is not comprehensive, but covers many of the pet-peeves that your friendly neighborhood Kcap team has endured and learned from over the years. For this reason, we are very selective with who we take on as a fee paying client.

Many readers of the Kcap trading blog whom are not fee paying clients have asked us to publish our returns. We are happy to report that the range for our client base in 2007 was up approx: 50% - 75% while the S&P 500 was only up approx: 3%....oops there’s that relative performance thingy.

Predictably, a few immature clients decided to pull out some money early in the year before our awesome returns really kicked in. Our bearish posture in the first half of 2007 had us slightly underperforming the S&P 500 at that time. Those clients that pulled some money away (others were asked to leave) were the type that failed most of the criteria that we outlined above. They missed out, and as Mr. T would say, “We pity the fools”. Happily, most of our clients remained fully engaged and are loving life with Kcap.

If You Held A Taser To Our Head:
Your friendly neighborhood Kcap team will continue to be uninterested in mediocrity. We will continue to implement the strategy of accepting and even embracing short-intermediate term volatility which we believe is a necessary component that through trading produces excellent long-term results. In addition, momentum and contrarian investing will both be deployed in our client’s portfolios which are guaranteed to produce volatility and at times underperformance (respectively) in the values of their accounts. This is our style and we remain excited and confident that significant long-term outperformance can be achieved. We encourage our existing clients to adhere to all the guidelines listed above. We are straight forward in our dialog to our clients and always look for willingness for them to follow these guidelines. Those that will not should leave.

This will be the last post of the Kcap Trading Blog for a long while. We are just too busy navigating the financial markets to maintain a regular posting schedule. The huge gaps between posts are unfair to the readership and we have decided to postpone this blog indefinitely. We will consider restarting the Kcap Trading Blog under a subscription service in the future as we add more resources. However, you may catch us posting to the free blog once in a blue moon just to say hi and share some thoughts.

If you want to start a fee-based money management relationship with Kcap, and have ($1.5 Million dollars net worth, including your home), call us to further explore at (732)617-9001. Oh,…and please call us only if you think you can meet the criteria that we have outlined throughout this final post.

Until next time, whenever that may be; Thank You Very Much for reading the Kcap Trading Blog – Hope it was informative, fun, and profitable.
All the Best,
Mitch and The Kcap Team

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The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
___________________________

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Alan and Ben 9/24/07

A significant amount of discussion has been targeted towards the comparison of Alan Greenspan and Ben Bernanke. Indeed, there are great reasons to dissect the similarities and differences of both men’s particular styles in managing fed policy. The implementation of FOMC policy has great repercussions to global financial markets. However, as traders we must remember that the Fed determining monetary policy is both science and art yet the market is not keenly aware of that fact. The degree to which each is used by the Fed depends largely on the person wielding the sword. Therefore, it is important to examine the differences of how fed policy will be administered under the new chief Ben Bernanke versus Alan Greenspan.

Alan Greenspan has frequently been referred to as maestro. Barely three months into his new job as Fed chief in 1987, was he tested with the October 19 crash. Most historians would agree that Greenspan handled that crisis and subsequent financial debacles over the years with incredible expertise. Greenspan is a master of understanding the complexities of the financial markets and how they are entwined with the real economies. He is also unmatched in his ability to communicate his intentions in a way that kept market watchers informed yet unable to predict his next move. He is widly recognized for implementing a strategy that helped Foster economic growth through the use of low short term interest rates due to his staunch belief that increased productivity from the advent of technology was a sustainable force in the global economy. Importantly, he believed that the high productivity levels that we enjoyed in the late nineties were instrumental in keeping inflation at bay. Greenspan fully embraced this concept and was therefore less concerned about being preemptive in fighting future inflation. A more preemptive Fed would have hindered economic prosperity at that time.

Many people fail to recognize how much art as opposed to science Greenspan used in deciding short term monetary policy. He was not afraid to take swift action when the financial markets called for it regardless of the long term affects to the real economy that the inflation hawks screamed about. Often, he would adjust short term interest rates inter meeting based on his gut feeling of how the real economy might get affected by short term stress in the financial markets. He felt comfortable taking strong action due to his overall comfort level with long term inflation. In other words, he felt that he had the maneuvering room to address short term hiccups whenever they occurred. Essentially, Greenspan handled monetary policy much like a short-term trader handles volatile stocks in a portfolio. He had tremendous confidence to utilize his instincts and commanded respect in the financial community to put policy into action without being challenged. Ultimately, this became known as the Greenspan Put.

Ben Bernanke is perhaps the polar opposite of Alan Greenspan in many ways. Ben is much more of an academic than Greenspan and therefore administers fed policy in a much more scientific way. Economically, the key difference between the two men and their economic philosophies has to do with their belief in the importance of expectations theories. Simply, research around expectations theories imply that markets adapt to economic policies. How well it adapts is dependent on the market’s view of the level of commitment to the policy by its creators. Greenspan, in his nearly 20 years as fed chief, shied away from intermediate term expectations policy and relied much more on addressing short term hiccups due to his overall comfort with the long term economic outlook.

Having a new Fed chief (Ben) who demands that markets adapt to fed policy based on intermediate economic forecasts for growth and inflation will have profound market implications that are different than the Greenspan era... In essence, the markets are likely to go through bouts of love and hate relationships with this new Fed chief. We can expect that this Fed chief will sometimes be perceived as a rock star much like Mr. Greenspan and other times like a stubborn mule unaffected by the misery that the financial markets may be experiencing at any given time. The threat of short term dislocations in the financial markets and possible spill over to the real economy will not prompt this new Fed chief to act until he sees actual evidence that threatens his intermediate term forecasts. In other words, the new fed chief will only appease the markets when there is clear evidence that the real intermediate economic forecast is being negatively affected due to stress in the Financial System, unlike Mr. Greenspan who played the financial markets with rate adjustments almost at his whim.

All in all, Alan Greenspan had the approach of a short term stock trader and the control of a maestro, while Ben Bernanke has the stuffy feel of an academic, frequently satisfied to delegate decisions to the consensus of the board of fed governors. This also holds true for the intermediate-term economic forecast that is currently in place at the Fed which is the lynch pin of current monetary policy. Market participants need to understand this key difference between Alan Greenspan and Ben Bernanke in the implementation of Fed policy going forward.

If you Held a Taser to Our Head:
The Fed recently acted aggressively in the face of the current credit crises by reducing the short term target rate by 50 basis points. Thankfully, recent economic data pointed to a marked slowing of the economy. Had this not been the case, the financial stress in the stock and bond markets would likely have not been enough to warrant such dramatic action from this new Fed chief. Your friendly neighborhood Kcap team firmly believes that Greenspan would have acted aggressively even if the economic data did not show a noticeable slowdown in the economy.

The rally that has been taking place in the stock market over the past 3 to 4 weeks has largely run its course. Perhaps a little more upside is in store due to the psychological boost from the aggressive fed action. However, make no mistake about it; this credit crisis is not over and has many more months of pain to inflict on the Financial System. When key overhead resistance levels are hit on the major averages (specifically around the all time highs), the market will be vulnerable to more bad news regarding the credit crisis….. And yes there’s plenty more bad news to come. In essence, the market is experiencing a counter rally in a larger downtrend. Therefore, we firmly believe that we have not yet seen the lows in the NASDAQ or the Dow. Once the countertrend rally has played itself out, the market will be ripe for aggressive short selling again.

Hope all is well.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
___________________________

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The Beginning of the End? 7-30-07

Has the Market finally cracked? Are the Bears finally going to be vindicated? The ursine views have been plentiful but completely ignored for sooo many months. Time after time those dip buyers have managed to step in to save the day taking the market to new highs. No amount of negative news has deterred them despite the overwhelming evidence that a nasty pullback was tremendously overdue. The question now is whether the recent downdraft constitutes the beginning of a change to the uptrend.

After such tremendous success that the bulls have enjoyed for so long a change in trend can only materialize from very specific price action. In other words, Traders would be unwise to place too much emphasize on actual news content as the underlining reason for the beginning of a Bear rout. This is due to the fact that the ursine arguments have been around for quite a while. In essence, we must defer to the actual price action within the market and key underlying securities to help us determine if there indeed is a physcological change.

In our prior post, we outlined several areas of concern that might serve as the catalyst for bearish action. The first one that we mentioned described the ramifications of a credit crunch for private equity players and associated balance sheet risk for large financial institutions. Apparently, this concern seems to be the straw that is in danger of breaking the Bull’s back. However, even this catalyst is not as important as the actual price action that we must pay careful attention to in the coming weeks. The market is just as likely to fluff off this credit concern as easily as it has disregarded so many negative developments in the past. On the other hand, the market can choose to extrapolate this credit crunch to the global economy and start to simultaneously heed all the other Bearish arguments as well. Oh my, not knowing is so UNBEARABLE! What is a Trader to do???

The market is entering an oversold condition this week. In addition, end of the month window dressing may provide a decent excuse for the dip buys to reemerge. Should a rally occur (and we expect it will), it will be very important for the beleagered financial sector to lead the rally. Furthermore, the internals such as breadth and volume need to be at least as strong as they were weak during the recent decline. Favorite stocks that helped define the bullish psychology such as Apple Inc. need to assert themselves in a leadership role. If the bulls can put these key attributes together, then there is still a chance that the Bears will go back into hibernation. On the other hand, if the rally is lacking ANY of these key ingredients, than the danger of a horrific Bear attack will become very real. In fact, your friendly neighborhood KCAP team has been long preaching that the Bear attack (when it finally gains traction) will be utterly gruesome. Unfortunately, this has caused us to sound the defense alarm way too early.

Simply put, there is only one way to know if this is the beginning of the end. We will need to judge the makeup of the reflex rally. Regardless of its internals, traders and investors would still be wise to protect their capital by raising more cash or hedging. We are also not opposed to shorting the major indices at this juncture with loose stops to allow for increased volatility. We acknowledge that KCAP has sounded the Bearish alarm prematurely over the past several months; however that does not mean that we have been incorrect in our assessment of the tremendous downside risk that this market has been carrying for quite some time.

There are times in the market when the downside risk is mild or moderate. Impeccable timing during those times will not save our readers significant money from losses. However, there are other times when the downside risk is severe and we are often premature when we send out the warning. The benefits of heeding that advice are usually much appreciated AFTER much patience is exhibited. Remember, those who called a premature top in 1999 but stayed with their convictions were ultimately more than vindicated.

On a more fundamental note, we have been feeling very concerned about the underlying message that is coming out of the Fed recently. After studying recent minutes and various testimonies from Big Ben , it has become evident that the Fed sees itself in uncharted waters. They have recently signaled that the use of the Philips Curve will be even less helpful in their quest to balance inflation and growth. They have also signaled their concern about a systemic slowdown in productivity. Unfortunately, they seem to be groping for a methodology to accurately model future Fed policy. Recent Fed remarks about the utilization of “expected inflation” as a tool to target and adjust policy are indeed disconcerning. The uncertainties surrounding such a methodology will lend itself to significant adjustments and second guessing by the Fed as well as the financial markets. This will significantly add to the volatility to Global Fixed Income and Equity markets in the coming years. Furthermore, an uncertain Fed raises credibility issues and translates to uncertainty in the financial markets.

Most professionals have learned the hard way that uncertainty is far more damaging to financial markets then even severe and prolonged negative news flow. What is even more shocking to us is how little commentary there seems to be from market professionals about the Feds apparent plea to the academic community to help it model future inflation expectations and growth implications in the new global arena. We find the Feds state of confusion to be quite distressing. Expect to hear more chatter about this topic from market gurus in the not too distant future. However, the market is preoccupied with issues of credit for the time being.

If You Held A Taser To Our Head:
We are still of the mindset that the risks out way the rewards on the long side in the current environment. While we believe a reflex rally is in the cards, the chances for failure are quite high. Importantly, should that failure materialize, there’s a long way to FALL… and we’re not talking about autumn. We are cognizant of the stubborn nature of the dip buyers and how they may save the day yet again. Regardless, the market holds a higher level of downside risk than most people are aware of…. even the Bears. Although this has been true for some time, and has made anyone with a defensive posture look downright silly, the day of reckoning will be at least as ugly as the rally was beautiful. In other words, play defense regardless of the internals of the expected reflex rally.

We understand that many readers are frustrated with our almost non-existent posting schedule. Perhaps we will beef it up again sometime later in the year. However, our fee paying clients are receiving tremendous personal attention. Those of you that wish to join should give us a call at (732) 617-9001.

Hope you are doing well.

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The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
___________________________

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"Natural Causes" 5-30-07

What was the catalyst that actually popped the “dot com” bubble? Does anyone remember? Amazingly, there is no consensus of what the actual event or catalyst was that sent the market spiraling to hell in a hand-basket. Do not suggest valuations, rampart speculation, or dubious metrics that were used to calculate valuation of the so called “new economy”. Those greater fool games persisted for quite a while before all of a sudden on one day they seemed to matter. The reality is that there is no one dramatic catalyst that derailed the greatest bull market of all time.

When reflecting back to those days, few will remember when President Clinton and Prime Minister Tony Blair jointly stated that the tremendous benefits derived from the mapping of the human genome needs to be made available to the public for little if any cost. Believe it or not, the NASDAQ started to become unglued just after their public remarks despite the fact that the biotechnology sector was not leading the NASDAQ at that time. Apparently, sentiment towards speculative stocks finally began to be questioned in earnest. Mind you, there were many times before in which speculation was seriously questioned. For some unknown reason, the speculative trend abruptly changed on or around that exact time. Was that the catalyst?

When looking at today’s market, bullish sentiment is pervasive. Sure, there are many skeptics who have not fully embraced the market, but we challenge you to find anybody willing to aggressively short this market. The bulls have been taking comfort that the bear case is too widely understood which is the reason that it fails to translate into lower stock prices. The theory is that too many have already taken defensive action due to the obvious concerns that the bear case lays out. Therefore, there is sufficient sideline money to keep the market drifting ever higher. While that certainly may have contributed to the relentless rise in the DOW over the past several months, it now seems reasonable that the bull case has become equally apparent. Ultimately, the sentiment will change, resulting in sharply lower prices. The problem is that identifying the specific catalyst is next to impossible.

Here are five areas of concern that Kcap believes can magically serve as the catalyst that reverses the uptrend:
1. The market is being largely fueled from private equity firms insatiable appetite. Therefore, nobody wants to short even a Bad Company (hey, wasn’t that a rock group in the 70’s?). Unfortunately, the major private equity players are starting to feel a little dizzy at these heights. Should their access to capital fall into question, the market would not take it kindly. The risk of the spigot being abruptly turned off due to higher interest rates and tighter credit standards from financial institutions is very real. After all, it is the major financial firms that are shouldering much of the risk in this latest episode of leveraged buy outs.

2. The slowing U.S. economy is indeed a serious threat and growing more alarming every day. Major retailers such as Lowes and Staples are showing no signs of bottoming with their dismal forward guidance. The housing sector is also showing no end in sight in its deterioration. Interest rates are starting to creep higher on a global scale which will further dampen the beleaguered housing sector and worn out consumer. Financial institutions have a historically large 38% of their loans secured by real estate… not a pretty site for this potentially ugly vicious cycle. Furthermore, gas prices are at all time highs and hurricane season has only just started.


3. Most importantly, the U.S. is catching a tremendous positive spillover effect from the out of control Chinese Index. The Chinese stock market has almost quadrupled in the past couple of years and is due for a very nasty correction. A dramatic pull back in that market will have serious consequences for the world’s growth forecasts. Even Allen Greenspan sent out a warning beacon which was largely ignored primarily due to his poor timing of his irrational exuberant speech in the mid 90’s.

China’s recent one day correction of 10% a couple of months ago are now a forgotten memory as that index has soared over 70% since then. The Chinese public is literally picking stocks based on numerology and astrology verses fundamental analysis. There are over 300,000 new brokerage accounts being opened in China every day.

All actions to date from the Chinese government to slow the assent of the speculation have failed. If the Chinese economy and its financial market are the primary engine of growth, what will replace them when they abruptly stall… especially when the U.S. economy is riding in the back seat of the Chinese racing car? Picture yourself sitting in the back seat of this car with an inexperienced Chinese driver as he zooms ahead at over 180 miles per hour. Also imagine that one of the wheels on the car is missing a few LUGNUTS! That is what the current market environment feels like to us.

4. Much is being made about the “shrinkage” in the equity markets these days. Buy backs and private equity firms have been removing available shares for purchase. While this is another excuse for momentum players to bid stocks higher, we must never forget how quickly and in unison market participants act. In other words, these momentum bulls will not be willing to buy even ONE share of any company when the $#!~ hits the fan. The decrease in outstanding shares in the overall market due to shrinkage will not cushion the fall. In fact, it may actually fuel the drop as traders actively search for shares to short that are no longer plentiful.


5. Many people are drawing comparisons to today’s market to the mid 90s. We take exception to that analogy due to the fact that GDP averaged 4% during 1994-1998 while inflation fell from 2.5% to 0.7%. Today, GDP is averaging 1.25% while inflation stubbornly persists around 2.5%. The threat of recession is on the horizon with even higher inflation due to commodity prices. Clearly the fundamental backdrop is different compared to then.

If You Held a Taser to Our Head:
When an old person who sufferers from many ailments finally dies, people ask what was the actual cause of death. The answer often comes back that he died from “natural causes”. Today’s bull market is old with many ailments. Ultimately, the media will state that the rally which commenced in the summer of 2006 died of “natural causes”. The only problem is that their conclusion will be broadcast AFTER the market suffers tremendous dislocations to the downside. All profits and more will ascend to money heaven. Everyone will talk about how a market that looked sooo good suddenly looks sooo bad; and no one will want to buy even one share.

Dangerous times ahead.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
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"Thats Hot!" 04/08/07

Yes Paris, the economic report was indeed “Hot”.

On Friday, market non-participants (due to the long holiday weekend) were treated to a surprising nonfarm payroll and unemployment report. Most were anticipating soft numbers largely due to the recent soft readings in previous economic data. Surprisingly, nonfarm payrolls came in at a strong 180,000 new jobs (higher than expected) while unemployment inched down to a historic low of 4.4%. Previous month’s jobs gains were also revised higher.

Although many were hoping for soft economic data in this report in order to increase the probability of a future Fed cut, the futures soared higher immediately after the release. How can this be, you may ask…? Well Tevya, very few traders were positioned for the long side ahead of the Holiday weekend and an unknown variable such as the formidable unemployment report. Furthermore, the slow dead-cat bounce that the market has been experiencing over the past couple of weeks has run into significant overhead resistance that has not gone unnoticed by market technicians. This has forced many into defensive positions. Therefore, the market was poised to have a short term pop regardless of what the actual figures came out to be.

The economy is at another tricky juncture. The housing meltdown probably has more to play out. Importantly, the ripple affect from declines in the housing sector has yet to be felt by the consumer. The market which intuitively understands this inevitable outcome continues to hope for a Fed rescue before the housing "soot hits the fan". Unfortunately, the strong jobs report implies wage inflation pressure in the making.

Friday’s 4.4% unemployment rate is exactly what the Fed did not want to see. The Fed believes that this historic level of full employment dramatically increases the risk of wage pressure in the system. This in conjunction with recent deceleration in productivity creates a dangerous brew of implied future inflation. The Fed has now been placed into a situation in which their magic rate cuts can only be delivered AFTER the housing spillover takes hold on the economy. More importantly, the housing problem in combination with implied wage pressure means that the economy is likely to suffer moderate stagflation before the Fed will be willing to act…not pretty.

The market being a discount mechanism is likely to sniff this out and offer some more pain in the not too distant future. The timing of the next leg down is difficult to preciously predict due to the very slow momentum moves that the market has been experiencing over the past several months. However, make no mistake about it, a second and third leg down to lower lows is a large probability (in our humble opinion).

If You Held A Taser to Our Heads:
We continue to believe that the NASDAQ will visit lower lows over the next few months. We have a lose target of NASDAQ 2250 before we are willing to get aggressive with a buy and hold strategy. We would not even be surprised if 2250 is breached in a quick but meaningful way. In the meantime, we are doing plenty of day trades (primarily using ETFs) on both the long and short side. Our stops are tighter than…well use your imagination.

Many readers have been complaining about our very infrequent posts lately. We understand your frustration, but need you to understand the intention of this Trading Blog. Originally, it was set up as an efficient method to communicate with our fee paying clients. Ultimately, we started attracting a steady non fee paying audience. Over the past several months, much of our communication with our clients have been telephone based.

For all the readers that have enjoyed The Kcap Trading Blog that are not fee-paying clients, feel free to call or e-mail us in order to explore a more in-depth relationship. Perhaps in the future we will revert to a more consistent posting schedule (which will likely include a subscription based service). In the meantime… be careful out there!

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The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
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Going "STAGflation" to the party? 3-22-07

So that was it? The end of the correction… Not! Corrections only end when people stop referring to them as corrections. When market participants are convinced that something much more hideous is underway, a correction can truly find a bottom. Unfortunately, the past few weeks never offered such a scenario, even though there were a few scary moments.

However, the market will likely continue to suck in the underinvested bulls and nervous bears before it continues the downtrend that started a few weeks ago. The “end of the correction” is being celebrated as dip buyers resume their dip buying activity that worked so well since last July with only a minor recent interruption. Ultimately, market participants will be faced with a critical decision as to whether or not the market is forming a double top or threatening an upside breakout. This pivotal moment may be approaching fast. So start choosing sides.

The dip buyers will have you believe that yesterday’s Fed language painted a rosy scenario. These stubborn bulls will preach that the power of a rate cut in the not too distant future will be the juice that is needed to cause the market to break out to the upside. The bearish camp will tell you that although a Fed cut seems likely sometime in 2007; real economic pain must be felt before the Fed actually acts. Remember, the Fed is always more concerned about fighting inflation then preventing recession. Therefore, although they may have slightly greased the wheels for a cut, the fed will certainly be waiting for the economy to cry uncle before a rate cut is actually delivered.

Unfortunately for the Fed, they are at a very tricky juncture. Their statement yesterday describes an economy that is showing signs of cooling with elevated signs of inflation… STAGFLATION anyone? Most market professionals who have been around long enough understand the dangers of being too heavily long a market in which the Fed is fighting stagflation. Evidence of the Feds quandary can be found by looking at their actual words compared to the January statement. The January Fed statement described “Somewhat firmer economic growth and stabilization in the housing market”. This has been replaced with “recent indicators have been mixed and the adjustment in the housing sector is ongoing.” Clearly the fed has taken notice of the cooling economy with this change in language.

More alarming is how the central bank altered the inflation paragraph. The new language reads “Recent readings on core inflation have been somewhat elevated”, as opposed to January’s statement which states: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time”. Kcap is not surprised by these changes in language since recent economic data points have demonstrated elevated inflation (Hot PPI report) in conjunction with sub prime woes.

If You Held a Taser to Our Head:
Did anyone notice how the complacency dropped like a rock with the collapse in the Vix? Market Participates are once again getting all lathered up over an immanent Fed cut. Most seasoned traders on Wall Street should have learned by now that the economy must suffer MUCH more before the Fed actually delivers. Only when inflation is well behaved due to accelerating productivity can the Fed cut rates when the economy is just showing preliminary indications of cooling. Most of the time, the Fed cuts rates when ugliness in one sector of the economy has already spilled over into other sectors. We are not at that point …yet! However, don’t fret… earnings season should provide a window of opportunity for the doves. Have you ever seen a Bear eat a dove? It’s not pretty! Patience and lots of cash is the way to play. Another way to think about the market and rate cuts and in keeping with the season, “you have to sit through the Seder before you get to the meal.”

Hope you’re being careful out there.

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The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
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Gotcha! 2-27-07

Good Evening.

Do we feel vindicated in light of the fact that your Friendly Neighborhood Kcap Team has been preaching to “watch out below” for quite some time? Do we feel vindicated in light of the fact that attractive prices in everyone’s favorite technology stocks exist once again? The short answer is…not yet vindicated, but soon. Most market participants resigned themselves to the fact that the only way to make money was to chase the extended ‘momo’ stocks that have gone parabolic over the past several months. Even experienced professionals who felt extreme pressure from their client base were forced to chase stocks at prices that were against their better judgment. Tomorrow morning, those same professionals will receive calls from the same clients, ripping the Money Managers a new ‘O’ for buying stocks at such ridiculously extended prices. The money management game is clearly a Catch 22.

Since the market has been so extraordinarily unreasonable over the past seven to eight months, traders should not expect any sort of logic to magically appear on the downside. In other words, although a new downtrend may finally emerge, the amount of head fakes are likely to be abundant. Ultimately the NASDAQ should give up virtually all of its gains that have been tacked on since late summer 2006. Do not be surprised to see the NASDAQ trading around 2250 before summer 2007. However, the path to 2250 is likely to be one of high volatility as opposed to the sickening, low volatile climb that the market beast has bestowed upon us over the past several months.

Very few Hedge Funds were prepared for today’s tremendous sell off. Virtually all Hedge Funds are still very net long as we type. In addition, many fund managers have never even experienced a downtrend that starts with a day like today. The head fakes are likely to chew them up over the next couple of months.

We are not predicting that the market will continue its decline in the coming days. Rather that the coming months will be extremely difficult for Bulls and Bears alike. However, the edge will clearly lie with the patient (and we mean extremely patient) Bears. Essentially, Traders must remember a very golden rule on Wall St. That rule states: “There is a tremendous gap between where trapped, long side momentum players stop selling and value players start buying.” That gap is also known as THE DEEP “abyss”. One thing for sure, when we enter THE DEEP abyss between now and the summer, there will be no signs of Jacqueline Bisset in a wet t-shirt. Who remembers that movie?

If you held a Taser to our head:
We have increased our short exposure and will continue to add to that posture on any rallies. Now that the VIX has spiked dramatically, expect more volatility and be patient scaling into your positions. As you know from reading our posts, your friendly neighborhood Kcap Team has been fully prepared for this type of action.

Hope you’re doing well.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
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Same 'Ole, Same 'Ole 2-15-07

Good Afternoon.

The market continues to exhibit remarkable resilience. Every time the Bears seem to get the slightest bit of an edge, the Bulls retake control and administer some more nicks and cuts to the ursine crowd. In fact, the Bears have been so battered over the past 7 months that the Bulls can easily have their way with them. Kinda reminds us of how Mr. Peepers from SNL devoured an apple. Think of that next time when the market suddenly springs to life as it teeters just above key support levels.

Big Ben has been doing his "thang" to the senate and house over the past couple of days. Essentially, he has reiterated the "goldilocks" scenario which has added more fuel for the Bulls. Many were dreading a more hawkish testimony; when that failed to materialize a nice relief rally took hold. However, the mojo seems to be a little light on this particular rally compared to the countless others that we have seen over the past several months. In fact, most of the upside has been coming from stocks that are bouncing versus any breakouts. This usually foreshadows better times for the Bears.

The earnings season is now complete and the corporate performance overall was lackluster. Amazingly, the market will look ahead to the preannouncement season that should start to make noise in the next few weeks. Market participants were disappointed with the corporate earnings growth and guidance which was announced in January. Therefore, they may be more hesitant in running the market up into the next go around.

The Gold and Energy stocks delivered a nice shakeout over the past month or two. They have since come back (especially Gold) and are starting to form a nice base at key levels. Oh, and Winter finally came to the Northeast despite what a few Energy Bears were starting to believe a few short weeks ago. OPEC has done a nice job of bringing down inventories and has even signaled that further supply cuts may not be needed. Are they anticipating tighter supply in which it would be difficult for them to keep up as was the case in early 2006? The U.S. Economy has certainly shown signs of stability taking the recession trade off of the table for the time being which also helps the intermediate term case for Oil.

If You Held a Taser to Our Head:
We continue to hold a healthy smattering of Energy and Gold longs. We also find ourselves dinking around with ultra short term trades on the long side due to our significant distrust of the market. We see many signs of danger and you can add the extremely poor relative performance of the Small Cap index versus the senior averages to our long list of complaints. Eventually reality will prevail and this market will give up a huge portion of the recent gains. The fact that the Dow and S&P 500 have not suffered more than a 2% correction since July is ominous. This type of action has not been seen in over 50 years and has made the job especially difficult for Money Managers who have any capability for market timing and or hedging. Only the Long Only funds are happy, in fact they are downright arrogant! Arrogance does not last long in the financial markets and always ends badly.

Hope you're doing well.

___________________________________________________
The analysis, opinions and/or forecasts expressed on the Kcap Trading Blog (“KTB”) are for informational purposes only and should not be relied upon in making investment decisions. By using this site you agree that Kleiner Capital Management, LLC (“KCAP”) and its principals are not liable for any action you take or any decision you make in reliance on any content. Please be aware that there is no commitment by KCAP to update the KTB. Furthermore, there may be inconsistent timing and follow up (if any) of posts.
None of the information on KTB is considered individualized investment advice and should not be construed as a recommendation or solicitation to purchase any securities. Reliance on information provided on KTB in no way establishes an advisor-client relationship. Investors are encouraged to seek the advice of a qualified investment professional prior to investing funds.
Clients of KCAP, as well as the firm’s principals and other employees, may be invested in securities discussed at KTB. However, any mention of said securities is not intended to influence market conditions for the security to the benefit of KCAP clients and/or principals and employees. KCAP is not affiliated with any advertisers on this site and does not endorse any of their content. For additional information and disclosures, please visit www.kleinercapital.com.
The information on KTB has been furnished from sources we consider to be reliable, but no guarantee is made with respect to accuracy.
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