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The Bulls Run!

The major equity averages surged Friday amid signs of strong economic growth and favorable inflation data. Analysts said the economy grew 3.8% in the final quarter of 2004, which was faster than initially expected, and investors came off the sidelines in the wake of the news. Buyers were encouraged by robust spending on capital equipment and on inventories of goods. Revised trade deficit numbers were also benign and a lack of inflation indicators gave support to an optimistic outlook for the coming year.

All of the bullish positions in the MCM Portfolio were bolstered by the broad-based rally but surprisingly, only one of the bearish plays; LM Ericsson Telephone (NASDAQ:ERICY), participated fervently in the upside activity. Shares of ERICY closed the session up $0.67 at $29.69 after a positive article in Fortune (online) and an unexpected buying spree in the Telecom group. While we don't perceive the recent rebound as a long-lasting trend, the issue is certainly threatening our sold (call) strike at $30 and we may soon need to take action to prevent a loss in the spread. These measures, should they become necessary, would likely involve buying the stock to cover the (short) option position. Our initial stop for that order will be near $30.50, which corresponds roughly to a near-term technical "top" in ERICY and is slightly below our cost basis in the original position. Traders who are unfamiliar with this technique should refer to the strategy narrative posted in the MCM Portfolio on 2/15/05.

A number of readers have asked about the lack of "new" positions and while we have been diligently searching for viable spreads, the shortened period (4 weeks) between the FEB and MAR option expiration dates, as well as the current dearth of "premium" in equity derivatives, will likely limit the number of plays during this cycle. However, we will continue to scour the market for favorable candidates and even if we don't uncover any spreads that meet the strict MCM criteria, we will certainly continue to publish "supplemental" positions for those traders who have additional account collateral and are willing to take on a bit more risk in their personal portfolios.

MCM Staff

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