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November 14, 2006

Nose Bleed Section

Before the market opened, index futures surged about a half percent on news that producer prices remained very tame last month. Despite the head start, stocks failed to muster any momentum post-open. Within minutes both the NDX and SPX were modestly lower, and continued steadily lower through the first hour of the day. It seemed as though we bears would finally enjoy the taste of some honest downside.

Alas, the selling was as brief as it was sweet. Stocks hit an obvious support level and elbowed higher. By the end of the day, the shoe was on the other foot. Rather than the bears riding the momentum from reversing early gains in the futures, the bulls triggered what appeared to be a short squeeze and took stocks to new multi-year highs.

To add injury to insult, metals reversed early gains to close lower. So on one hand, we have stocks ramping higher because a tame inflation report indicates the Fed can start cutting rates sooner than later, yet on the other, we have metals prices down because lower inflation means lower metals prices... nevermind the part about the Fed cutting rates. As usual, we see the masses extracting only the favorable aspects of whatever news is on the boards.

For another example, observe the action in Intel today. The shares popped 4% on news that Intel was introducing the first quad-core processor. It doesn't matter that PC and server sales are falling through the floor, leaving doubt as to how well these chips will actually sell. It also doesn't concern traders what the introduction of these chip will mean to the remaining $4.7 billion of inventory on Intel's books. Intel introduced a technology ahead of AMD, so full speed ahead.

With regard to Intel and equities in general, the total disregard for the risks posed by the unwinding of the housing bubble is just stunning. The old adage of stocks climbing a wall of worry has been flipped on its head. Stocks are climbing a wall of placation. One could equate this action to a mountain climber scaling a snow-covered, avalanche-prone slope and deciding to take another step higher simply because the avalanche hadn't started, yet.

Disclosure: Short Intel, Long INTC Puts


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