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June 28, 2005

Reversed Reversal

A sharp rally today put the “I told you so” chip back in the hands of the bulls. Most financial news sources attribute today’s action to the $2 drop in oil along with higher-than-expected consumer confidence levels. Although these data points could have played a role, regular readers are familiar with my view that reasons for day-to-day movements are rarely discernable with certainty. What is certain is that the passed week’s “surprise” sell-off did not receive immediate follow-through. Whether or not this means that last week’s bearish signals were false will only be known a couple weeks from now. I believe today’s action can just as easily be attributed to quarter-end activity and/or anticipation of Fedspeak later this week as to oil and consumer confidence.

To the chagrin of housing bears, the homeys have posted two consecutive days of strong gains following their apparent breakdown last week. If the stocks re-approach their highs, a defensive posture may be forced upon us once again. I strongly discourage anyone without enough fortitude to accept quick and strong losses from attempting to short the homebuilder stocks. They are very volatile and have a propensity for sending false signals. In general, the more widely a group of stocks is watched and traded, the more difficult their movements are to read. Fred Hickey shared his view on this in the most recent Barron’s roundtable, saying that he prefers to purchase long-dated puts in order to forego any attempts at timing. Of course, the volatility of these stocks puts a steep premium on the options, so they are not for everyone.

Despite the resilience of the homeys, I still believe their days are numbered. Unfortunately, I just don’t know what the number is. The primary duty of any traders is to keep risks in mind and thereby under control. Therefore, despite my view that the housing bubble is in its twilight, I have pondered many times as to what could sustain it. The only scenario I can imagine would save it is a renewed bout of massive inflation by the Federal Reserve. If they were to pursue this course, the U.S. dollar would collapse. So perhaps owing metals is a way to hedge short exposure to home builders. Food for thought.

Another pertinent piece of news was thrown in our laps today. AMD is suing Intel for unfair trade practices, alleging that Intel has violated anti-trust laws by bullying customers away from AMD’s products. The news sent AMD’s stock soaring over 6%. Interestingly, Intel’s stock also gained about 2% today. I think this lawsuit will start to expose AMD’s superior competitive position from the standpoint of technology and help them make inroads into Intel’s market share. I have been preparing a piece on the AMD vs. Intel story and will post it later this week.

Disclosure: Short INTC


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