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May 8, 2006 - Issue #005



Vantage Point II



What's going on here?

The market seems to be doing it's level best to frustrate everyone. Breakouts in the major indexes fail to follow through, in either direction.

Individual stocks are all over the place, often abruptly. Well known, solidly run companies, reporting increased sales and earnings, are taken out and shot because "expectations" were off by a few cents per share (see Chico's Fashions - CHS).

How can stocks rise in the face of also rising energy and precious metals prices?

Look at the Dow Transportation's performance, airlines, rails, and trucking. Does the rising cost of fuel have no adverse impact on them at all? It used to reflect an inverse relationship.

Again, what's going on here?

I suspect that, if we were able to peek inside their daily operations, many of these companies have learned how to hedge their costs via the futures markets. How else could they do it?

There is also a more systemic problem at work here.

Ever since the markets went decimalization, specialist firms and market makers have seen their profit margins squeezed.

Whereas, before, "ticks" were 1/8 of a point ($.125) now, under decimalization, they are $.01. It used to take 8 price changes to move a point, now it takes 100 price changes to move the same point thus requiring more capital to maintain markets.

The effect has forced market-making specialists either to come up with more capital, reduce the number of markets they make, merge, or drop out altogether. Many have chosen the latter. The large clearing firms, that guarantee their trades, have sent the message, "get big or get out".

It is my understanding that many former market makers are now trading like "locals", that is, without making a two-sided quote, letting the public "make" the market.

And then, there is the huge influence of the increase in "hedge" funds. The markets have become even more "institutionalized" than they were before. To an individual trader, it's like being a mouse in the midst of a herd of elephants. A dangerous place, indeed.

All the more reason to use options to hedge risk.

Possible LONG candidates that have attracted my attention lately:

In the Dow Transportations:

Overseas Shipholding Group - OSG $51.46

In the S&P 500:

Tenet Health Care - THC $8.02

In the S&P 600 (Small Cap):

Spectrum Brands - SPC $16.21

Jo-Ann Stores - JAS $14.10

Check them out. See if you see what I see.





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