It was a rough week to own stocks, as the major indices plunged and oil prices spiked in response to escalating violence in the Middle East. RealMoney's bloggers were all over the market action, and once again this weekend, we'd like to share the "Best of the Blogs" with readers of the TheStreet.com. These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.

Let's take a look at Jim Cramer on Google's stealth move into Internet telephony, Rev Shark on how to spot capitulation, Cody Willard on why there's room for both Microsoft and Google to prosper, and Steve Smith on why you shouldn't take your clothes off.

Click here for information on RealMoney.com, where you can see all the blogs -- and reader's comments -- in real time.

Cramer's Blog: Google Makes More of Internet Buzz

Originally published on 7/10/2006 at 11:56 AM

You have to be a believer about Google ( GOOG) taking over your phone business.

If you don't, check out the story in today's Investor's Business Daily about what Google has done. The company has bought a ton of dark fiber, and it has bought stakes in companies that do broadband over power lines and Wi-Fi.

I know eBay ( EBAY) bought Skype, where the sign-ups are hot and heavy. But the switching costs for this kind of stuff are going to be seamless. More important, you know Google wants to be an Internet Service Provider (ISP) -- it needs to do that just to grow, and I think that it is a natural to offer an all-in-one package.

I think this initiative, stealth as it is, has hit eBay, along with a slowing in its core business (the company's not saying it is going into the ISP business).

I also believe that Google has so much money, it simply isn't difficult to pull off, even as Yahoo! ( YHOO) declined to do it because of its partnership with AT&T ( T). But that partnership was made before it was obvious that phone calls were going to be free and you'd need to monetize it elsewhere. I don't see how eBay can monetize effectively. And of course, I see no hope for Vonage ( VG) to monetize once a Google gets going.

Put simply, I would rather bet on the two in the bush of Google than the bird in the hand of eBay because eBay seems singularly unable to figure out ways to make more money, and Google seems to roll out new ways weekly.

At the time of publication, Cramer was long Yahoo!

Rev Shark's Blog: Stealth Capitulation Draws Nigh

Originally published on 7/11/2006 at 11:58 AM

Capitulation is one of the most misunderstood and badly abused concepts in the stock markets. The word is thrown around with abandon and often just out of hope when the action is particularly miserable.

The concept is the cornerstone of contrarian thinking and is an easy one to grasp. Capitulation occurs when emotions become so extreme that people can't stand to hold on to losing stocks any longer, and they want out at just about any price. This is an indication that a bottom is near because everyone who is inclined to sell has already done so, and there is little selling pressure left.

Capitulation is most often thought of occurring in the form of a big whoosh down where there is a substantial point loss and then a quick snap back up as new buyers replace the capitulating sellers.

The crash in 1987 is probably the best example of capitulation. The market was downtrending rather sharply for a couple weeks. The DJIA had already fallen from over 2600 to around 2200 when on Oct. 19, it crashed 508 points and closed at 1738. The next day the market bounced back 102 points and the following day another 187 points. The market continued in a trading range with a fair amount of volatility for many months afterward, but the bottom was in after the panic selling of Oct. 19.

A crash like the one in 1987 is very rare. Much more frequently, capitulation occurs with a whimper of pain, not a crescendo of agony. The market is much more painful and cruel when it drips slowly lower over the course of many weeks. Those who are hoping and praying for a reversal are disappointed again and again, and the primary emotion is disgust. When no one can stand this slow painful process for another day, we bottom with a whimper and then slowly start to recover.

The low the Nasdaq hit in October last year is a good example. The low point came intraday on Oct. 13, when the Nasdaq managed a 25-point intraday swing on slightly better-than-average volume. There was never a huge surge of selling, just a steady drip lower and then an intraday swing, from which a new uptrend developed.

There never was anything that remarkable about the action. The downtrend simply went on long enough to wear out a sufficient amount of folks and cause them to give up. Capitulation took place with a whimper not a bang.

I believe the great likelihood is that we will see a similar turn in this market. We aren't going to have any great dramatic events that will signal the low. It will occur when disgust, dismay and weakness sets up. This market is already starting to whine and whimper, and with earnings season coming up, I think we are getting close to stealth capitulation.

Cody Willard's Blog: Tech's Not a Zero-Sum Game


Originally published on 7/10/2006 at 2:51 PM

You need a whole lot more than money
You need more than to survive
You need to keep your Love
Keep your Love alive
-- Heart

If I hear one more pundit or so-called analyst explain to me how Microsoft ( MSFT) today is IBM ( IBM) 20 years ago, I'm going to pull the bytes out of my hard drive -- er, the hair out of my head. OK, OK, we get it -- someone smart explained at some point how there are some parallels to the Internet wars between Google ( GOOG) and Microsoft and the PC wars that pitted Microsoft and IBM back in the day. The fact is, I think both Google and Microsoft are positioned to be big winners in the next few years, though I plan to own Google longer than I plan to own Microsoft.

Specifically, the conventional wisdom (and, seriously, if there was ever a time to call something "conventional wisdom" in technology and the stock market, this is it) goes something like this:

IBM utterly dominated the computing world and was making money hand over fist as it had grown to dominate mainframe and centralized computing. Microsoft, with software purchased from the slums of Albuquerque, N.M. (one summer in college, I lived on the same block where the beginnings of Microsoft were developed), was about distributed personal computers and bringing computing power to the masses. IBM froze and refused to accept the new paradigm, and Microsoft rose to dominate computing so much that it's still being punished for being too successful -- er, for supposedly being a monopoly.

Fast forward to 2006, and everyone (as in everyone) can explain to us how Microsoft dominates the computing world and is making money hand over fist as it has grown to dominate the distributed PC world. And now Google and others are coming up with all kinds of ways to distribute software and computing power over the Internet. The commentators then go on to explain how Microsoft is -- and this is where the conventional wisdom falls apart -- frozen and refusing to accept the new paradigm.

As Cramer used to title his columns back when I first read him in 1997, "Wrong!"

Look, Microsoft gets it. Bill Gates, Ray Ozzie and even the much-maligned Steve Ballmer understand that technology has gone, and is going, through another major paradigm shift that is enabling the masses yet again. And they're actively positioning the company to leverage that paradigm shift. They're rolling out a new operating system that will be the most user-friendly interface they can devise. They're integrating networking capabilities into every possible facet of the software.

With 98% of the world's billions of computers still running a Windows OS, Microsoft certainly has an entrenched user base to leverage. With that type of a base, I wonder when Softee will get serious about the voice-calling business. When it does, the rules of Metcalfe's Network Effects (scaled down from the original theories as they are) will really kick in for free voice calling, as billions of people will have instant access to it. Wonder if eBay's ( EBAY) Skype will join hands with Microsoft's voice services someday down the road.

"Yeah, yeah, Cody, but PC growth is dead. You're wrong about any upgrade cycle next year," you might be thinking. Well, Microsoft is addressing those issues, too, as it has developed operating systems for mobile phones and other mobile devices. It's getting into gaming, rolling out new gaming consoles for the living room. It's getting into the Internet advertising distribution business, which is indeed the future of advertising and a business that will make a lot of companies, including Google and Yahoo! ( YHOO), a lot of money. It's not like Internet advertising is a winner-takes-all sector.

Indeed, despite all the catcalls, Microsoft is having some meaningful game-changing success. MSN has become one of only three meaningful portals on the entire Internet (Google and Yahoo! being the other two, of course). How's that AOL.com site doing?

To be sure, there's plenty of execution risk with Microsoft because regardless of its strategies and tactics, the company might fail to deliver results on those decisions.

A couple of years ago when Google had first come public, I used to rail against the conventional wisdom that Google was in trouble every time Microsoft rolled out a competing product. In those days of yesteryear, Google would get hit just about anytime Microsoft sneezed in GOOG's direction. A few hundred days and a few hundred billion dollars in market cap swings later, I think the pendulum has swung too far in the "Microsoft is helpless" direction. Both of these companies are likely to be big winners in the latest historic new paradigm of computing that we are all witness to. Technology's not often a zero-sum game, you know?

At the time of publication, the firm in which Willard is a partner was net long Microsoft and Google, although positions can change at any time and without notice.

Steven Smith's Blog: No Need to Go Naked

Originally published on 7/13/2006 at 9:02 AM

One of the first lessons any options trading course or book tries to drill into beginners' heads is to not sell options naked; that is, have a position that is net short any number of contracts.

The simple reason is naked positions are exposed to unlimited losses. Because of this, most online brokers have used technology that prevents customers from even entering sell orders that would create an uncovered position. Only those that have achieved some 19th level of expertise or consciousness, and have at least $100,000 in their account, are permitted to go naked.

But even the most sophisticated and well-financed traders should not implement or leave themselves exposed. Or as Charles Cottle, a former market maker and one of the smartest options strategist I've met, simply put to me, "There is never, ever any reason to have a naked option position."

But for many people, myself included, this is a hard lesson to learn. Even after many painful losses, the lure of selling something that has no intrinsic value or is "worthless" is too great to resist, and so you find yourself carrying positions that could potentially put you out of business in a single day. Trading approval levels aside, one of the basic rules of trading is to never have more than 15% to 20% of your capital at risk in any one position at any one time.

Aside from chewing up risk capital and tying up money in margin requirements, there is a more insidious problem that develops from being naked, or carrying a position in which losses can grow exponentially: It requires constant monitoring and can be mentally exhausting because the tendency is to try to defend the position as soon as it starts going against you. And because no one is right all the time or has trades that are always immediate winners, positions will inevitably at some point go against you.

If you are naked, you are back on your heels, and any adjustments you make after the initial sale are likely to be creating "losses" that you then hope will be offset by ultimately being correct as well as by the march of time. In one sense, time decay is both a best friend and worst enemy to a premium seller; it creates a wind at the position's back, but it also leads to trading the clock, not the price action. Your brain is telling you the position is wrong and taking a small loss would be prudent, but there is always a small voice, especially if the option is still out-of-the-money and "worthless," that says if you can just hold on a few more days things will improve. Sometimes they do, but often they don't.

So instead of shorting calls or a straddle outright, consider selling a spread for a credit or using a condor, both of which place a defined and limited risk on the position. Sure it reduces the maximum profit, but the upfront cost is usually lower than what defensive adjustment carves out of the profit potential. And unlike the naked position, which has an opportunity cost, establishing a defined risk from the outset allows one to take advantage of price movement.

For example, if one is short a strangle and price starts to rise, the tendency would be roll the put side up to protect the calls -- or if the market really jumps, be forced to buy higher strike calls and create a belated spread position. In both cases, the adjustment has reduced the original profit potential.

If you had started out using spreads or a condor-type position and the price raises, you can cover the put side, lock in that gain and hold the call side, whose maximum loss should now be limited to less than the profit potential. In this way you are able to fade moves, that is, sell rallies or buy dips, and bring the position's risk/reward profile -- which for credit positions can start at 3:1 -- toward a 1:1 ratio. Even I know those are better odds.

Professional option traders, such as market makers, will always make sure their numbers are straight, even if it means just buying a bunch of cheap "worthless" on-the-money junk. If the best and most sophisticated traders aren't willing to go naked, why should you?

Speaking of an ounce of prevention, I'm heading off to the dentist now and expect to return midmorning.
David Morrow is editor-in-chief of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.