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April 27, 2006

In Fed We Trust

The Fed continued its semantics game with Chairman Bernanke testifying on Capitol Hill this morning. Bernanke uttered a blatantly non-committal statement, and his lap dogs on Wall Street responded in true Pavlovian fashion. The statement that got everyone drooling is quoted as follows:

"Even if in the committee's judgment the risks to its objectives are not entirely balanced, at some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook."
His phraseology is not quite as playfully mendacious as his predecessor's, but is sufficiently obscure, nonetheless. Naturally, the eternal optimists at our nation's trading desks took "no action" to mean and end to rate hikes and "at some point in the future" to mean presently. Traders gave no thought to Bernanke's next statement, "A decision to take no action at a particular meeting does not preclude actions at subsequent meetings." In other words, if we skip a rate hike at one meeting, it doesn't necessarily mean we're done.

The Bernanke spurt boosted equities about one percent from their lows, with tech stocks receiving the most enthusiasm. A few of the winners on my radar include Intel, Apple Computer, Broadcom, and Lam Research. I took advantage of the rally to short my first Apple shares in a few weeks, though I opened only a small position thinking that I may still be early on this one.

Reaction to Bernanke also translated into intraday bounces for gold and silver, both of which recovered from about one percent losses to being flat. However, silver later tanked and finished the day off nearly 3%. In light of this weakness, I would guess silver has more downside to work off. Meanwhile, the dollar chugged to a new yearly low.

A couple of blowups in the housing arena sent the homeys reeling. Both Centex and Beazer reported new home orders 11% and 19% below last year's levels, respectfully, and their shares got hammered for 8% and 3.5%, respectfully. Home builders as a group fell about 2%, with Toll Brothers, KB Home, and Hovnanian all suffering multi-percent losses. Interestingly, given these new data points signifying rapidly weakening demand, Building Materials Holding managed to pull off a 2% rally before closing with half that gain. Perhaps traders were buying along the "easy Fed" theme or perhaps today was simply a technical rebound. Either way, BMHC's outlook is unimproved. Home builders are facing record inventory, weakening demand, and plunging median sales prices. They face no pleasant alternative to cutting back sharply on construction, and only an unmitigated bout with denial will stop them from doing so.

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


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