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October 24, 2005

Event Horizon

Looks like a Bernanke Fed is on the horizon. The nomination of Mr. Helicopter for Chairman of the Federal Reserve sparked a "put" rally in equities today. Bulls are celebrating, pushing equities up nearly 2%, with the perception that any financial crisis will be met with ample money printing to stave it off. Ample money printing they will surely get under Bernanke, but this does not mean stocks will always go up. Since late 2001, the Fed has printed money like never before, yet the markets have not set new highs.

In fact, bulls point to the nearing end to this rate hike cycle as potential fuel for a big move upwards. I would like to remind bulls that the stock market is more closely correlated with long term rates than short ones. I firmly believe the next rate cut will be done to stave off early sign of a sharply weaker economy. In such a scenario, we could end up with Conundrum II: falling short rates and rising long rates, coupled with a weaker stock market, and the Feds inflationary effort are likely to create another bubble, this time in precious metals and commodities.

As for the near term, an important juncture faces us on the stock market. With technical indicators blaring mixed signals, it's time for bull/bear face-off. One of the camps has to make a strong move. Being an unabashed bear, I believe a strong move downward is imminent, but I do not know if we see a sharp short squeeze before this happens.

Back to today's action, Research in Motion was hit with a bout of gravity today, falling a little over 3%. Given today's overall market strength, I can only speculate that support for this stock has weakened considerably. It seems to me that any decisive close under $60 will be followed by cascading selling. There are simply too many black spots on this issue, and once traders get a whiff that the gig is up, they will likely exit in droves.

Apart from RIMM, everything else on my radar pretty much got gobbled up today. A few sharp gainers which I hope to either short or short more of soon include: Centex, Toll Brothers, Fannie Mae, Best Buy, F5 Networks, and Apple.

Disclosure: Short RIMM, FFIV; Long RIMM Puts


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