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November 1, 2005

Another Non-Event

Why anyone still pays such close attention to FOMC meetings can only be put down to entertainment. The effects of the actions of our favorite interest rate manipulators take weeks, if not months, to develop, yet markets react dramatically after each meeting's press release. The most perverse aspect of the drama is that traders react not to the interest rate change, which is more or less know beforehand, but to the minutae of the way the release is worded, which is often obscure and un-interpretable. Furthermore, long term stock prices are more closely correlated with long-term bond yields than the Fed Funds rate, but the results of Treasury bond auctions rarely make headlines these days.

Speaking of long bonds, 10-year Treasuries fell a bit today, pushing the rate back up near 4.60%. This move, in combination with people's fascination with the rising Fed Funds rate, should have knocked rate-sensitive equities today, right? To a degree, they did. Financials fell a bit, as did fixed income. However, housing stocks rocketed up as if their boom just caught a second wind. The stand-outs were Beazer and Centex, both of which gained over 3%. Over the next few days, we will find out if these two are leaders or exceptions.

Dell's woes took a turn for the worse as Bear Stearns downgraded the stock today. Dell shares were hit for 8% and have fallen over 20% after their 10% down day for their August earnings release. Sales and cost-competitiveness have been dogging Dell for quite some time, and the cracks finally showed up a couple months ago. Intel feels Dell's pain because they are the exclusive supplier of processors sold by Dell. Dell has no choice but to add AMD's faster, lower-cost chips to their product lineup. The question is not if, but when. In commiseration with Dell, Intel fell about 3.5% today.

Today's action did not reveal any obvious information about the near-term market direction. The next few days should be more "talkative" as traders have time to ponder interest rates. I await the coming action with curious anticipation.

Disclosure: Short BZH, INTC; Long INTC Puts


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