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September 29, 2006

Bears Quartered

During my brief jaunt to New York, there was no lack of news for companies whose names frequent these pages. Unfortunately, the news was all bad, at least from my point of view. On Wednesday, Newmont Mining announced they expect a shortfall in gold production for 2007, citing problems with foreign operations. While the issues may be, to a large degree, out of Newmont's control, it is difficult view the announcement without disappointment. We Newmont bulls have frequently pointed to the excellent management team headed by Wayne Murdy. Under his direction, NEM eliminated costly hedging operations, purchased a stake in Canadian Oil Sands which in retrospect looks like a give-away, and refrained from making acquisitions simply for the sake of a show of power. However, these foresights can only carry the company so far. Ultimately, Newmont's job is to pull gold out of the ground and sell it. Yet the company has repeatedly disappointed investors with production shortfalls.

Certainly, Newmont fans must be left with less of an appetite for NEM shares, and an adjustment of exposure in accordance with risk tolerance is always appropriate. However, I believe that now is the wrong time to be fleeing. Despite the production shortfall and a couple of downgrades on the stock, Newmont is still positioned quite well to take advantage of the gold bull market. This year's drop from $62 to $42 is more about doubts pervading over the gold market than about Newmont's performance. From the technical perspective, NEM shares solidly held support at $42 and did so with impressive volume. My view is backed by my money. While watching the action Wednesday morning, I picked up a block of NEM calls, and, in a stroke of luck that seems rare these days, got them pretty close to the day's low.

Turning to Research in Motion, the company's earnings announcement sparked one of the biggest buying sprees of 2006. I must admit surprise, not only to the degree to which guidance was raised, but to the scale to which the stock was ramped in its wake. My best explanation for the size of the move is that fund managers saw the good news and wanted to have the shares on their books for the end of the quarter. As for the sharply-raised guidance, I have no explanation since I have not had time to fully examine the release. My put options are now worth about as much as the lint on the bank of my pants. It's back to the drawing board on this one.

The third quarter of 2006 was rather tortuous for bears, especially for those that kept large positions. Most of the rally was characterized by slow, grinding gains and very little excitement. It just didn't feel like a bull market ought to feel. Whatever the outcome of the 4th quarter, I just hope volatility picks up a bit so we traders can catch a buck here and there.

I'd like to close out the 3rd quarter posts with an interesting observation in the S&P 500 chart.

stock chart

We see above that the SPX broke upwards out of its bearish wedge. Lest bears be too discouraged, turn your eyeballs slightly to the left and see this is exactly what happened in May just before the early-summer cascade. Will this pattern repeat? I guess we will know soon.

Disclosure: Long NEM; Long NEM Calls, RIMM Puts; Short NEM Puts

 

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