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September 12, 2006

Vertical Leap

Everything is okay in the world. Oil prices, along with most other commodity prices, are falling. Therefore, inflation has once again been contained. Best Buy reported solid earnings growth on the back of widescreen sales, and CDW Corp posted 7.5% sales growth year-over-year in August. Therefore, all the talk about the consumer being in trouble is hogwash. Things are so good that even the presidents of Iran and Iraq were caught shaking hands and offering support to one another. Ergo, bears are simply full of useless information and even more useless advice.

Such seemed the sentiment on Wall Street today as stock prices went vertical. The Nasdaq 100 popped a healthy 2%, as did the Composite, while the S&P 500 tacked on 1%, seeing its best gains come from financials and retailers. Hardly a stock was spared the torment of higher share prices except for those representing companies committing the awful sin of making money selling resources.

The irony in the fall of commodities prices is that it is being partly driven by expectations of reduced demand as the economy slows, yet stocks are rising under the same conditions. Recent news seems to have truly instilled a sense of confidence that the economy will once again achieve a soft landing. I believe the market has it backwards. The recession will not be easy, and earnings will fall precipitously. Meanwhile, commodity prices will skyrocket while the Fed pumps the money supply in efforts to curb damage. Nevertheless, the opposite view prevails for the moment.

I must admit to a fair bit of surprise over the strength of this rally. While I anticipated a bounce, as noted yesterday, to work off an oversold condition, I did not anticipate a move that would erase all of September's losses. The safety net was deployedÂ… I reeled in a few more shorts and now sit mostly sidelined, waiting with an itchy trigger finger.

Disclosure: Long CDWC Puts


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