The bond market was further ratcheting down expectations for

Federal Reserve

tightening on May 7 in the wake of some weaker-than-expected economic reports this morning. That was the good news.

The bad news was that the data showed the economy's recovery is losing steam, which was helping restrain equities at midday.

Retail sales rose 0.2% in March, half the gain forecast by economists, while February's figures were revised to 0.2% from 0.3%. Additionally, a preliminary reading on the April University of Michigan consumer sentiment index came in at 94.4 vs. 95.7 in March and against forecasts for a rise to 96.8.

The March producer price index was higher than expected at 1%. But the core was in line with expectations at 0.1%, and the rise in overall PPI was due mainly to higher energy prices, which were retreating after Venezuelan President Hugo Chavez resigned. Crude futures were recently down 6% to $23.50.

In reaction to all this, as well as reports of another suicide bomber attack in Jerusalem, the price of the benchmark 10-year Treasury was recently up 10/32 to 97 25/32, its yield falling to 5.16%. Fed funds futures, which had been pricing in 80% odds of a Fed rate hike on May 7 just three weeks ago, are now pricing in odds of less than 15%.

Stocks were having a far more subdued session. After an initial spike, presaged late Thursday by news the

Securities and Exchange Commission

had dropped its preliminary investigation into


(IBM) - Get Report

accounting, major averages were recently meandering in modestly positive territory.


A story earlier this week about

housing and related shares drew howls of protest from the group's many supporters.

One fund manager, whose firm is long




M/I Schottenstein

(MHO) - Get Report

, and


(LEN) - Get Report

, even defended


(NVR) - Get Report

, whose chart he admitted "screams Internet" stock.

This Is a Healthy Chart?
Like many homebuilders, NVR has posted dot-com-like returns, but supporters say the similarities end there

Source: Baseline

The fund manager, who requested anonymity and whose firm has traded NVR, noted CEO Dwight Schar bought shares of the stock in late September.

Curiously, Baseline had no record of the purchase, but

Insider Insight's

director of research Jonathan Moreland confirmed Schar bought 100,000 shares of NVR between Sept. 19 and Sept. 24 for between $130.97 and $138.59 a share. Moreland said the CEO took advantage of the SEC's loosening of "short swing" rules in the aftermath of Sept. 11; previously, Schar would have been prohibited from buying shares for six months after his sale of 113,000 shares at about $189 in late April 2001.

Most notably, Schar has yet to sell those shares, which midday Friday were trading up $7.76 at $350.86.

"The problem with the comparison between the homebuilders and Internet stocks is of course the obvious fact that homebuilders make money and trade at relatively cheap valuation

especially compared to the Internet" names, the fund manager commented. "Shorting these stocks is what I would call the avant-garde thing to do in investment circles today, but they have great earnings and earnings growth, a relatively stable interest rate environment, great demographics, and

are in the middle of what is without a doubt a bubble."

Homebuilders will be good shorts only after breaking major technical trend lines, mortgages rates really start climbing, and sell-side analysts claim the group can still do well despite higher rates, the fund manager suggested. "Until then, all shorts are doing is trying to pick a top and

are getting clocked." (For the week ended April 12, the average 30-year fixed mortgage fell under 7% for the first week in five weeks, according to Freddie Mac.)

Speaking of clocking the shorts, the high short interest in many homebuilding stocks is "future buying activity," Salomon Smith Barney analyst Stephen Kim recently suggested. Short interest averaged 13% of the float of homebuilders' shares at the end of March vs. 12% in January, he noted, citing

Beazer Homes

(BZH) - Get Report


Toll Brothers

(TOL) - Get Report

as "the most extreme positions," with 29% and 28% of float, respectively.

Contrary to popular misconceptions, I'm not blind to the

positive factors supporting housing and am not averse to quoting those who express them (see above). But I think investors should be wary when supporters of a group use the term "bubble" without prompting or when they suggest high short interest is a reason to be bullish.

Perhaps "the homebuilders will take out as many people on the short side as the Internet did," as the fund manager claimed. But, ultimately, I fear the sector will burn as many people on the long side as the dot-bombs. All I'm saying is there's no sin in actually booking the paper profits many investors now proudly sport. Similarly, those looking to take positions in homebuilders need to be aware they're entering a battleground.

To wit: "A significant portion of the upturn in many housing demand and production statistics over the past few months was a function of unusually mild and dry winter weather throughout much of the country," Goldman Sachs' economics group commented yesterday. "If this is true, then these effects should be unwound sharply over the months just ahead."

If that is true, then gains for many homebuilding stocks risk being unwound as well.

Housecleaning, Part 2

Congratulations to Eric Barna of Garland, Texas, for correctly identifying the musical reference from

Wednesday's story as Ozzy Osbourne from the 1982 live LP "Speak of the Devil." Eric's winning email arrived at 6:28 p.m. EDT on Wednesday, and his copy of

The Stock Trader's Almanac

is already en route.

P.S.: I know Ozzy isn't exactly "high brow," but if you watch MTV's "The Osbournes," you'll know why he remains one of the most beloved and enduring characters in (you can't kill) rock 'n' roll.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.