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June 5, 2006

Bernanke-speak

The action is looking heavy out there in the sense that gravity is having its way with stock prices. After half-percent losses on the open, stocks struggled to gain footing over the next two hours, then turned and headed south throughout the remainder of the session. All the major indices lost at least 1.5%, but again, the tech-heavy Nasdaq indices were hit even harder. Much of the weakness can be blamed on more tough talk from Bernanke who, in a speech to the ABA today, promised that the Fed "will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained." Though lacking the grace of Greenspanesque phraseology, the message is clear: don't expect us to stop raising rates any time soon.

Mr. Bernanke has been surprisingly predictable thus far, but of course when one has few options, ones actions can be guessed with a higher degree of certainty. We all know that the Fed is trying to simultaneously preserve the dollar as the world's reserve currency and sustain the asset bubbles that have kept the consumer spending. We all also know that these objectives are incompatible, and that when the Fed is forced to choose between them, the dollar will be toast. Given that much of the dollar support is simply rhetoric, I suppose today's market action should have been expected simply based on the fact that Bernanke was speaking.

Despite the Bernanke-speak, if last week's rally has truly already fizzled, then this market is in much weaker hands than I anticipated. Whether we get a bounce or continued selling tomorrow will be very telling. Whatever the verdict, the action is likely to be sharp.

With the Fed talking tough, one would expect precious metals to be weak, but they actually rallied nicely early on with both gold and silver up around 1% (though silver gave back all those gains in the late afternoon). Mining stocks also popped strongly before giving up all their gains... and then some... into the general market sell-off. My guess is that the early strength was related to relief that the conservative candidate, Garcia, won Peru's election, mitigating concerns over potential nationalization of mines, and the latter weakness was due to worries over a tough Fed. Whatever the reasons, the psychology driving mining stocks does not appear to be conducive to resuming a bull market rally anytime soon.

Bear Stearns sent us SanDisk bears a present this morning by issuing an upgrade on the shares. With the stock up about 3% in the early going, I decided to add to my put collection. Major pricing problems lie dead ahead for this company and its industry, and upgrades such as these not only do a great disservice to whomever Bear Stearns is trying to advise, but also demonstrate a dearth of basic research on the part of their analysts.

Housing-related equities also suffered on the heels of Bernanke's threats of higher rates. Home builders were bashed to the tune of 4%. Traders who have been looking for an oversold bounce to sell, including myself, have been disappointed. Housing shares appear to be undergoing a powerful reality realignment, and may not bounce until being treated to a capitulation. Those of you who like to observe signs of the metaphysical nature may find meaning in the fact that the Dow Jones Homebuilders Index will start 6-6-06 at just above the 666 level.

Whatever.

Disclosure: Short SNDK; Long SNDK Puts

 

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