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September 6, 2005

Disaster Relief

America spent the long Labor Day weekend taking in harrowing images of disaster in the wake of Hurricane Katrina. Many observers in the press and many politicians, including Louisiana Governor Kathleen Blanco, were quick to criticize President Bush for not responding more quickly to provide aid and military assistance. Apparently those critics, including Ms. Blanco, are unaware of the constitutional requirement that a governor submit a written request to the President before Federal troops can be used to enforce civilian order.

Nevertheless, help arrived and relief efforts are fully underway. Wall Street shrugged off the economic impact of the disaster, anticipating relief of its own. The street consensus now is that the Federal Reserve, in response to the Katrina disaster, will hold off on raising rates or perhaps even cut them. The consensus partied to the tune of about one and a quarter percent. Today's rally is just another symptom of the "All News is Good News" psychosis. Perhaps the market will go up even further if we wipe out a couple other American cities?

Nary a sector went untouched by the celebration, although Fannie Mae continued its unremitting slide and Research in Motion gave back some of its recent rally. Housing stocks enjoyed about a 2% rally with hopes flying that lower rates will extricate them from impending doom. Ironically, 10-year Treasury rates, which have served to fuel the housing boom more than short rates, rose 5 basis points today.

The other relieving news fueling the rally was the fact that oil prices are subsiding instead of soaring. This news will be of little surprise to readers of since last week I stated my expectation that the mini-panic would prove to be an interim top. I am remiss to declare victory just yet, especially since the oil stock I sold is still above my selling price, but let's wait and see how things continue to unfold.

Disclosure: Short RIMM


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