Tuesday, October 26, 2010

Archived Repost - The Contrarian: Root Canal Bottom (10 Oct, 1998)

The following is an archived post which I published in October, 1998 (from The Contrarian - notes from the wall street underground). This month would mark an important bottom, on the heels of the Russian financial crises and which culminated with the blow-up of Long Term Capital Management (LTCM). Emotion was high during this period, and while leadership stocks were considerably strong, especially in terms of relative strength, sentiment throughout the investing community was resolutely negative.

This material was poorly archived, as it was published pre-Blogger and with a password-protected site. I'm beginning typing these up now because I am using some of the material on a related work.

Saturday, October 10th, 1998
Root Canal Bottom

A great time to be alive, this week was. CNBC was especially entertaining. You must understand, dear reader, that I am tortured throughout the day, and throughout the week, by CNBC. It's not that I hate CNBC, it's more that I like very little of anything. And for such a spiteful sort as me to have to listen to that show, endlessly mind you, well it is every bit like torture. Subtle, continuous torture; the very worst kind. It doesn't end there either, my sweet. This is a dark little hole I live in but there is no lack of light really. Not with this mess of computers and that dreadful tele. I am continuously and forever bombarded with flashing lights and incessant noise. It's never quiet here. Add to that the jet planes and freeway traffic and you can see that I am not to be envied. Perhaps you can relate. Perhaps you live in this modern world as well. I cannot envy you either, it seems.

So it was with genuine pleasure that I witnessed my oppressors losing their talking heads. There was no sign of greed this week at all (bond traders excluded). This week it was no longer a question of BEAR, it had become a question of how big! Yes, it is religiously preached to us to buy low, and for the "long run." But on such a week as this it always seems more important to raise cash; all of a sudden. Never mind that back in July the market looked as bad as it did - we were "long term" investors then, right? Never mind that the T-bill rate is now a point and a third below the discount rate; is that even positive? Never mind that the 10-day CBOE Put/Call ratio is at historic highs. Never mind that the top two Wall Street heroes (Abbey and Ralph) lowered targets and estimates for the market, the Dollar was free-falling against the Yen (thank you), the President Clinton was again doomed, and the entire financial sports world was crumbling faster than the Ruble on a bad day.

In fact, the market looked quite good. It is undeniable to me now. Consider this - in the throes of all this tragedy and emotion, the market itself didn't behave panicked at all. It was hardly down relative to the contagion of fear and panic evident throughout the investment community. If you had only watched the reaction, you would have thought the market was down a thousand points, three days in a row.

It was not all roses here, however, don't let my cool tone fool you. I was buying illiquid small cap stocks on the way down, while covering shorts, and I went into Thursday fairly long and with no hedge. I'm not telling you this to brag, dear reader, I think you should be aware I am insane.

By Thursday's end I was fully margined, long only. And those pretty little dental Biotechs I've been touting? Well I hope you didn't expect them to go "straight" up. I did say they would double from the lows made on this wave down, I'll stick with that. But KNDL, and PPDI in particular, reminded me of root canal - sans Novocain.

Other buys this week included Japan (EWJ), GENZ, YHOO, AOL, SEPR, ENMD, INTC, ORCL, MU, LIPO, SNAP, ...go team

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