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August 3, 2006

Same Old Tune

Equities continued in Fed rally mode today, perking indices a half to one percent, depending on where you looked, though late-day weakness tapered these gains a bit. The most telling evidence to implicate a Fed-is-done attitude for this strength is the fact that home builders were up 4% as a group. That anyone believes this industry can still be rescued by the Fed shows: 1) there is too much faith in the Fed, and 2) it is very difficult to break mass love affairs with formerly rewarding groups.

Apart from the homeys, tech stocks were once again the recipients of the most aggressive bidding... probably a reflection of the same two symptoms described in paragraph one... lead by our two darling superstars, Apple Computer and Google. Anyone observing an intraday chart of the NDX will see that trader mentalities have been anfractuous with regard to tech. The index has whipped between 1475 and 1518 several times in the last two weeks. I presume that stocks will get back to doing whatever it is they really want to do once the FOMC meeting is out of the way.

Intel shares bucked the trend by falling more than one percent. A report from the Semiconductor Industry Association confirmed what we already knew: there is an inventory glut of microprocessors. Microprocessor sales were down 12% year-over-year, mostly due to an average selling price 16% below that of a year ago. These numbers will become much more negative as a weakening economy forces a full-scale price war between Intel and AMD. Despite this report, AMD shares leapt more than 4%, sending me in search of an explanation. The best one I could find was hidden in an article on The Motley Fool which reported that Mort Topfler tripled his stake in the company last Friday. It pays to be in good company, though I think Mr. T may be early on this one.

Tomorrow's unemployment report could spark some volatility in stocks, but given the widespread anticipation of a Fed pause, I would guess that any volatility would come to the upside should the report back up the beliefs. There is so much optimism buzzing around the interest rate cycle, that any bad news between now and 2:15p on Tuesday may very well be ignored.

Disclosure: Short INTC; Long GOOG, INTC Puts


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