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Real Story: Bernanke's Bind

TSC Staff

It was a bad day for the bulls, as stocks and Treasuries each heard the worst from Federal Reserve Chairman Ben Bernanke's congressional testimony, TheStreet.com's Editor-at-Large Aaron Task says on Wednesday's Real Story podcast.

The chairman's comments that "weakness in housing and in some parts of manufacturing does not appear to have spilled over to any significant extent to other sectors of the economy," spooked stock traders because it makes a near-term rate-cut less likely.

In reaction, the Dow Jones Industrial Average fell 97 points, or 0.8%, while the S&P 500 lost 0.9%, and the Nasdaq fell 0.8%.

Meanwhile, Bernanke's insistence that the Fed's "predominant policy concern remains the risk that inflation will fail to moderate as expected" was displeasing to Treasury traders because inflation erodes the value of fixed-income securities.

The 10-year Treasury fell 5/32, its yield rising to 4.62% while the 30-year bond lost 15/32 to yield 5.83%.

Perhaps what really upset financial markets today is a sense that the Fed is stuck between the proverbial rock and a hard place, Task says. Bernanke may want to cut rates to prevent a subprime spillover and more weakness in business spending -- as revealed in the day's durable-goods numbers. But he doesn't want to unleash more virulent inflation by cutting rates and devaluing the dollar.

In the end, Bernanke ended up pleasing no one Wednesday, save for the bears.

Task's first guest, Cody Willard of CL Willard Capital and RealMoney.com , is not a bear, but he is worried the market will suffer more near-term weakness because of problems in housing infecting the broader economy. Willard "wants to get under the helicopters before [the Fed] starts throwing money," i.e., lowers rates later in the year but believes that will come only after more market weakness. (A video version of Task and Willard's conversation about the Fed can be found here.)

In the wake of Gamestop's (GME Quote) stellar earnings report and Microsoft (MSFT Quote) unveiling the Xbox 360 Elite, Willard and Task also had an extended conversation about the videogame sector.

The hedge fund manager's favorite plays in the sector include Adobe (ADBE Quote) and Netgear (NTGR Quote), and Willard says Sony (SNE Quote) is looking attractive as blu-ray appears poised to become the standard over HD-DVD. (A separate video of the video-game discussion can be found here.

TheStreet.com research associate David Peltier was Task's second guest Wednesday, and the two conducted their weekly "Should I Do It?" segment, taking listeners questions on Apple (AAPL Quote), CMGI (CMGI Quote) and a small-cap, Santarus (SNTS Quote).

In the remainder of the podcast, Task address the day's other corporate news, including the fallout from the Beazer Homes (BZH Quote) investigation, Circuit City's (CC Quote)job cuts and the action in RF Micro Devices (RFMD Quote)prior to its postclose warning.

Click here to listen to the entire podcast.