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October 26, 2005

Slowly Creeping

Amidst all the noise about the next Fed chairman, inflation, and possible White House scandals, no one seems to be noticing that 10-year Treasury yields have been creeping northward. They touched 4.60% today. As I noted a couple days ago, people seem to have forgotten that equity performance is more closely correlated with long-bond performance than short-term yields. Should the long yield continue to rise, which I think is highly likely in this environment of inflation, stocks will ultimately take heed and swoon.

For the time being, this trend is being ignored. The GSEs rallied nicely today. That's fine by me since I'm on the lookout for a point to short them, particularly Fannie Mae. How anyone can own a stock that doesn't publish accurate financials in a timely manner is beyond me, but if they want to bid it up so I can short it, more power to them. I can only imagine that FNM is allowed to trade only for political and/or public perception reasons. Though the government may eventually back their debt with the Federal Reserve's printing presses, I think the equity is worth zippo.

Speaking of creeping, the shares of F5 Networks and Research in Motion did nothing of the sort today. First, FFIV managed to beat the number with their earnings release. As I noted yesterday, I suspected they might pull it off. What I did not expect was a 24% pop in the shares. Of course, maybe a company that is facing impending competition from Cisco is worth 40 times TTM earnings and 7.3 times sales. Who am I to say?

RIMM pulled off a replay of a recent theme: drop sharply on news of an unfavorable court ruling, halt trading in the shares, then pop $2-3 upon resumption of trading. Today's news is really no news. The Supreme Court merely said they will not prohibit the District Court from issuing an injunction against RIMM's Blackberry sales pending the Supreme Court's decision about whether to take the case. However, District Courts traditionally do not take action until the Supreme Court makes their decision, anyway. In any case RIMM is another doomed equity, though I don't think it is worthless as is the case with FNM. RIMM should pull at least $8-10 per share!

Disclosure: Short FFIV, RIMM; Long RIMM Puts


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