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March 16, 2006

Bogus Numbers

This morning our government published another in a long series of bogus CPI numbers indicating tame inflation. Initially, equities lapped it up, extending the recent rally which has been fueled by anticipation that the Fed may be about done with this rate-hike cycle. Given the overextended nature of the rally (from a technical perspective), I got the impression that we may witness a sell-the-news turning point, so I took advantage of this morning's strength to sell some of my broker's Apple and Building Materials Holding shares.

I decided it was time to re-short BMHC in light of two other reports published this morning: new housing starts and building permits. Housing starts came in slightly higher than forecast, which may partly explain the rally in home builders, but the more interestingly, building permits, an indicator of future construction, fell 3.2%. Combine this decline with this month's Housing Market Index, which hit its lowest level since 2001, and you get a lucid picture that new home sales and new home construction are on the wane. Whether or not you believe housing is a bursting bubble, there is no denying that construction is slowing, which is not good news for industry suppliers such as BMHC.

Equities hit a brick wall about mid-day with all the broader indices slumping. Tech stocks lead the way down, with the Nasdaq 100 closing today's session in a high-volume reversal and nearly a percent below yesterday's close. Apple, one of the larger NDX components, played no small roll in the move. The reversal supports a strong case for continued weakness. The S&P 500, on the other hand, broadcast a mixed signal by conquering its upper trend line while simultaneously posting a bearish hammer. So much for resolution.

The day wouldn't be complete without noting that Intel, another large NDX component, fell on high volume and touched its 2006 low. In conformance with recent behavior, Intel shares slumped hardest and heaviest into the close. At some point this stock will suffer panic selling, perhaps coinciding with an earnings release or triggered by simple frustration on the part of all the suckers who have been accepting the shares being distributed to them by smarter money. Eventually I will have to return the shares I borrowed to sell, but maybe that owner won't want them back by then!

Disclosure: Short AAPL, BMHC, INTC; Long INTC Puts


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