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May 9, 2006

Dialed In

As I glance across markets today, a preeminent theme is glaring back at me: that of a long list of interest-rate sensitive assets putting in sharp moves. Fannie Mae and Freddie Mac were up 3% and 1%, respectively. Mining stocks gained sharply on the heels of corresponding sharp gains in the metals. The U.S. Dollar fell a half percent, and commodities as a group, as measured by the CRB index, were up 1.5%. Even Building Materials Holding, in a void of news, popped 3%. One would think the FOMC announced a pause to rate hikes this morning!

I can't help but get the impression that pause language is already dialed into prices for the most part. If we do, indeed, hear the p-word tomorrow, there may not be much upside left in equities, and, in fact, exhaustion could set in fairly quickly in a classic case of sell-the-news. Likewise, if we do not hear any easy-going language from the high court of clowns (which I think is more likely), the disappointment could send equities reeling. Based on this reasoning, I decided to shift slightly more to the short side of things by opening small put positions on a few high-flying tech stocks.

One of these stocks is Lam Research, a company on which I executed an unsuccessful put trade ahead of last month's earning release. I have been intending to build a short position around Lam for some time, but have thankfully remained on the sidelines waiting for more obvious signs that the market has topped. Lam, like Building Materials Holding, is a major supplier to an industry that is in the process of rolling over. Though many semiconductor suppliers survived the April reporting period, there is simply too much inventory building up on their customers' balance sheets (Intel, Texas Instruments, Motorola, etc.) to believe that they can escape another quarter without fessing up to their predicament.

In other tech news, Dell offered a mid-quarter report yesterday evening that was less than inspiring. They revised Q1 bottom-line expectations downward by 5 cents per share while holding revenue in line at $14.2 billion. Basically, all the massive price discounting they have been offering has done nothing but lower net margins. Dell shares shed nearly 5% today, dropping to levels not seen since early 2003. Given that Dell is an Intel-only shop, their woes reflect poorly on Intel, and INTC shares fell 1% in commiseration. Anyone wondering what an overall tech bust could look like over the next 12-18 months should pull up a weekly chart of DELL.

GM gapped up on today's open following an upgrade from Deustche Bank. The company also revised their reported Q1 loss of $323 million to a gain of $445 million. Lest you GM bears panic, take note that there was no improvement in GM's operating income or even a change in cash flow. The revision is completely accredited to a reclassification of costs related to health care.

Sitting on about a 5% gain going into the last hour of trading, the markets then got word from CEO Wagoner that he expects a strike at the Delphi unit to be avoided. GM shares spiked into the close, ending the day with a 10% gain. A little over a month ago, I mention how GM's chart was starting to show some strength, so I was avoiding taking short positions in fear that any positive developments could send the shares rocketing. I am now glad to have followed my own advice.

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

 

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