Growth and Inflation 10-3-05

Good Morning.

Overseas markets were mixed with Asian markets under some pressure and European markets in a good mood. Economic news released this morning at 10:00am were the ISM and Construction Spending. While the Construction Spending was essentially inline up +0.4% the ISM number was much stronger than expected coming in at 59.4 versus expectations of 52. What is very notable is that the ISM report was the first major national data point since Katrina. Its surprising strength along with the severe increase in Prices Paid component of 78 gives little comfort to the Fed doves. The New Orders component was also up very sharply at 63.8. All in all, this report showed growth and inflation as opposed to stagflation which we have been seeing recently.

While the Fed may take this as a queue to continue hiking, market participants should consider celebrating the fact that the alarm of stagflation may have been misused. However, one report does not make a trend, so we will have to watch closely. Nonetheless, this is a step in the right direction for our long term Bullish thesis for the NASDAQ.

The stock market spiked up this morning as it likes to do every Monday morning, but it quickly faded on the release of the ISM report. Concerns that the Fed has more tightening work to do spooked the narrow minded traders. Furthermore, realization that the stock market has not broken out of its downtrend along with the fact that end of quarter markups need to be unwound, is fueling some selling pressure.

Semiconductors continue to annoy most traders due to their persistent strength over the last few days. Clearly their levity is skewing the averages and holding the NASDAQ up which is denying it a good rinse. The SIA has announced that inventory levels for chips are very low. This may be fueling some of the recent move. Keep in mind that Semiconductors are not the best leading indicator of end user technology demand. We much more prefer consumer oriented appliance sales i.e. personal computers, cell phones, and high-end electronics for a better indication of end user technology demand. Furthermore, end of year corporate spending plans much more accurately reflect infrastructure build-out potential.

The stock market is also being slightly buoyed by merger news. NRG Energy (NRG) is buying Texas Genco, RH Donnelley (RHD) is buying Dex Media (DEX), and NTL (NTLI) is buying Telawest Communications (TLWT). Mergers of any sort indicate that someone is finding value and willing to step up and buy.

The Rosh Hashanah Holiday starts tonight and may be providing psychological pressure on the market. Despite the fact that so many Jewish people work on Wall St. the Exchanges choose to stay open. Perhaps this is why the old adage has developed, "Sell Rosh Hashanah and Buy Yom Kippur".

We intend on maintaining only a 20% net long position due to the high risk we foresee for this market. Unless other internals show improvement, we will grin and bare it if the market moves slightly up without us.

Hope You Trade Well.

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