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April 24, 2006


Precious metals continued their post-quake volatility, bouncing all over the place in the last 18 hours. Overnight, silver was looking pretty with a 30c gain, but by the time New York closed, the white metal was staring at a $1.30 loss! Gold also initially tried to pop, but ended the day down around 12 bucks. As I wrote last week, I believe it will be quite some time before the metals are more easily handled, so for the moment it is just a waiting game. The miners pulled back in commiseration. I have a feeling we will be able to repurchase all these assets at cheaper prices in coming months.

Equities did a whole bunch of nothing today. A weak start was reversed midday, and we ended pretty much where we started. It seems the bulls were encouraged that the early selling was not stronger and played on that strength to pop the market a bit. A couple interesting notes include Intel sliding to yet another low, closing below $19 for the first time in three years, and home builders slipping almost 2% collectively. The bigger losers included KB Home (down 2.5%), Toll Brothers (down 2.4%), Beazer (down 3.6%), and Hovnanian (down 2.5%).

Many of the homeys appear to be on the verge of bigger breakdowns. Home construction continued at a torrid pace in the first quarter despite sharply rising inventories and average selling prices nearly 10% below their autumn peak. The inventory of unsold homes now stands at 4.9 months. An inventory glut is not a good problem to have in a weakening demand environment... just ask Intel.

Building Materials Holding will shed new insight into the current state of affairs of the housing market when they report first quarter earnings tomorrow. While everyone knows I am bearish on BMHC, I have no strong feeling about whether they make their number. My uncertainty stems from the aforementioned torrid rate of home construction in Q1. Reasonable or not, that rate of construction certainly fueled the demand environment for BMHC, and if they make their number for Q1, they will have few qualms, if not outright incentive, to affirm or improve guidance. On the other hand, a lot of expectation may already be built into their share price. Exactly where that expectation lies is unknowable until after the market reacts to what they have to say.

Disclosure: Short INTC, BMHC, Long INTC, TOL, BMHC Puts


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