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March 15, 2006


The bulls got what they wanted today: follow-thru on yesterday's pop. The S&P 500 is now nestled right up against its upper trend line, so tomorrow offers a potentially decisive point in the bull-bear battle. Today's gain was accomplished in the face of slumping long bonds, which gave up most of yesterday's gains. Both 10 and 30-year Treasuries slipped, pushing yields up 4 and 5 basis points, respectively. At some point higher rates will draw money out of equities, but it's impossible to say what rate may trigger a broad shift.

Just in case no one has noticed, the dollar has been falling off a cliff this week. The slump may have been instigated by various statements from Fed governors, interpreted as hints of a policy shift away from rate hikes, and/or concern about the inevitable rate hikes coming from Japan. In any case, continued weakness in the greenback should ultimately have a weighing effect on equities.

I have to admit that equities have held up much longer than I anticipated. They have shown resilience in the face of both fundamental barriers and negative technical indicators. Interest rates are higher on both end of the spectrum. The primary impetus behind the economy over the passed several years, housing, has been quickly cooling. Energy prices, along with commodities prices in general, are sharply higher. Geopolitical turmoil threatens to bring us into another military skirmish, if not war. Debt levels are at all-time highs while savings rates have plunged to below zero. Odd-lot short sales are on the low end of their historical range. Broad stock indices are showing waning momentum, both in terms of oscillators and participation. In addition, we have mutual fund cash levels at near all-time lows.

Nevertheless, indices are at, or flirting with, 5-year highs. Traders and money managers feel bulletproof right now and therefore risk tolerance has built to silly levels. These situations are usually rectified when a crisis plays the role of catalyst for an unwinding. What the catalyst will be and when it rears its ugly head is anyone's guess, but I'm convinced it will happen. Common sense won't let me believe the bull case that every problem can be solved with more money printing. As I've written in articles in my Macro Center, money printing only brings about inefficiencies under the guise of economic activity. Eventually, the imbalances and misallocations of resources must be rectified.

Turning to today's action, former market superstars Google and Apple both slipped. I almost opened a new Apple short today, but decided against it. I can't give a specific reason why I didn't pull the trigger. Sometimes one just has to follow instinct, for better or worse. Perhaps tomorrow will tell me something different. Research in Motion tacked on about 7% as traders got back to the business of being blissfully optimistic on this company's prospects. The small put position I've been holding since last year is more or less worthless, but it is trivial. RIMM shares are now 40% above where I last held a short, and I look forward to spotting an opportunity to short them again at these much elevated prices.

Disclosure: Long RIMM Puts


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