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Comments in the BLOG

Recent postings in the BLOG include commentary on NetWork Installation (OTC BB: NWKI), Datascension (OTC BB: DSEN), and Xenomics (OTC BB: XNOM). XNOM was out with interesting news on Friday, and it's worth a read. The other two simply traded poorly this week against a backdrop of the subject of today's edition. Your comments and questions on any or all three are greatly appreciated.

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Short Term Traders Get Out; This Market Is Not For You

Today's edition is the most important message in 2005.

The first quarter of '05 came to an end Thursday. The results are in. The market sucks right now. That's the technical term I choose to use, and you probably won't find it in any formal research report from Goldman Sachs. I'm sure many of you feel the same way.

Unless you are exclusively in energy or commodities, you are probably down in Q1 '05. The market is driven entirely by fear right now. It feels a lot like last May and June when we virtually fell apart for two months. Back then it was war with Iraq, uncertainty of the Presidential election, and rising oil prices. Today it's higher oil prices, rising commodities, and signs of inflation. But the big ugly out there is the fear of rising interest rates.

Here's some hard facts on Q1 '05:

• Healthcare funds ended down 6.1%
• Technology funds lost 9%
• Real-estate funds fell 6.7%
• The S&P 500 and the Dow fell 2.6%
• The NASDAQ fell 8.1%

The poor performance in large cap stocks is magnified in small and microcap stocks. Take Isonics for example. This stock was a trader's darling in the 4th quarter. I watched it, but never traded it. The stock was $1 in early October, and eclipsed the $6 mark three times before the end of the year.

The company recently received a $22 million cash injection in the form of convertible debt at $5. Someone with big money thinks they are going to make money above $5.

Despite a flow of positive developments, this stock is getting clobbered. The big MO players are just dumping it indiscriminately, with little regard for value.

ISON is not an isolated case. I could put up 20 similar charts. OTC Journal favorite Global ePoint (NASDAQ: GEPT) has suffered the same fate.

I believe the return of inflation and higher interest rates has the market totally spooked.

In my view the Volatility Index, affectionately known as the VIX, is masking very high levels of fear. The VIX is a complicated measurement of options trading which measures put buying against call buying. The VIX has been very low in recent months, but I don't believe it is the accurate indicator it used to be. Fear can be more accurately measured elsewhere.

For example, did you know that the March 15 short interest on the NASDAQ and the NYSE is now the highest it has ever been in history? As of mid-March, total Nasdaq short interest rose to 5.577 billion shares, up from 5.357 billion in mid-February. NYSE short interest on March 15 rose to 8.419 billion shares from 8.007 billion shares on Feb. 15. These levels are the highest ever seen.

So- here's the moral of today's very important edition: Short term traders get out. If you are the type of investor that checks your quotes every day and lives and dies with each tick, this market is not for you. Values could erode even farther before this market perks up. If you are not a long term investor who believes that superior growth will eventually lead to higher prices, please liquidate your portfolio and wait for Big MO to come back. I will still be around and I will be clueing you in when upside momentum comes back.

If, on the other hand, you have some patience, and don't worry too much about market related price erosion in companies that are growing 50% to 200% per annum, just hang in there and perhaps pounce on some oversold bargains. As stocks drift down, I will be looking for a lot of our favorites to bottom out higher than last August's low.

Here's a recent quote I found from Bob Doll, chief investment officer at Merrill Lynch Investment Managers in referring to his outlook for 2005:

"It's one that is going to cause folks to struggle to make money," he added. "It's not going to be easy to say, 'Give me your favorite stocks,' put them in a portfolio, and then wake up at the end of the year and hope you've done well. We're using the term 'muddle through.'"

Despite the gloomy tone heretofore, there are some positives to look at. For example, I believe the market takes a great deal of pleasure making the maximum number of people look as silly as possible as often as possible. The pervasive negative sentiment could be just the fuel the market needs to send stocks through the roof. After all, the highest short interest in history represents a lot of pent up demand to buy.

In addition, I believe fears of higher interest rates are overblown. Here's the evidence. From 1995 to 1999 the S&P 500 rose 23% per year on average. It was one of the greatest bull markets of all time.

During that time, the overnight Fed Funds Rate averaged 5.5%. Today's overnight Fed Funds rate is 2.75%. We have nearly 2 points, or another 7 "measured" interest rate increases by the Fed just to get back to the same interest rates we had during one of the greatest bull markets in history.

Here's how I see 2005 setting up. We are experiencing '04's May and June right now. The seasonal strength will come back later in the year, just like it did in '04. It's happening earlier this year, so we may be setting up for a nice summer rally.

For those with some perspective, now is not to time to harvest. It's spring. Now is the time to plant so you can harvest in the Fall. Plant the seeds of capital over the next several months and harvest some nice profits in the Fall. There's the concept. I'll keep delivering the facts on all the companies we follow. You decide which ones you like. 

The June 20, 2004 edition makes an excellent read right now. It was entitled I'm Dreaming of a Green Christmas, and things ended up working out quite nicely in the latter half of 2004.

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