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June 28, 2006

Imbalances

There must be something about being appointed to a top-level financial position in the U.S. government that causes one's IQ to rapidly diminish. Only minutes after being confirmed as Treasury Secretary, former Goldman CEO, Henry Paulson addressed the widespread concern over our country's debt imbalance by saying that increased global growth will help address the issue. Growth is not the problem. Poor economic policies are the problem. Paulson also stated, "I look forward to working with other major economies to implement policies that will lead to faster, more balanced growth abroad..." In other words, more market manipulation lies dead ahead... hardly what the world needs to operate efficiently.

Markets saw a little strength in today's session, lead the energy sectors, which have been catching some bids over the last few days on the tails of a $3 rise in the price of a barrel of oil. The top three on my list, ConocoPhillips, Chevron, and Encore Acquisition, all tacked on more than 2%. Overall, today's partial rebound from yesterday's bear party was not particularly impressive, but we cannot expect too much decisiveness from traders ahead of the conclusion of the FOMC meeting.

The basic MO for these meetings is for markets to react sharply to any surprise, or to go where they want to go if the meeting concludes as expected. I believe the markets betrayed their hand yesterday when we saw a sharp sell-off during this usual quiet period before the Fed, so barring a surprise, the market's direction after the meeting seems likely to be down. In any case, traders have recently placed more importance on FOMC meeting notes than the banter released after the meeting's conclusion. The world will be privy to those notes in about 3-4 weeks.

We will also be wading through an earnings reporting period in coming weeks. It will be very interesting to see if companies like Intel, SanDisk, Lam Research, and Texas Instruments... among many others... can bury their inventory problems through one more report. My instinct tells me that July will bring pain and disillusionment, and I intend to selectively build my short positions over the next week. My efforts, though, will be executed from abroad since early next week, I will venture on a greatly-anticipated two-week vacation to the island of Paros in Greece to visit one of my best friends. While I will be casually checking in on market action and news, my level of attention on such matters will be substantially abridged. Therefore, after this Friday my next daily review will be posted on July 17, and after Saturday, my next Q&A will be posted on July 22.

Disclosure: Long EAC; Short INTC; Long INTC, SNDK, LRCX Puts

 

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