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January 25, 2006


One of the themes highlighted in my Outlook 2006 post in the Macro Center (also graciously published by, was that the bond market would suffer this year. Given rising inflation expectations, as reflected by soaring money supply figures, the incentive to hold U.S. Treasuries is diminishing. Today, the U.S. government held a bond auction that didn't go so well, and bonds of all durations fell sharply. The 10-year note shed 21 ticks, raising its yield back to the 4.5% mark.

Today's weak bidding was blamed on prospects of another rate hike coming from the Fed next week. The idea is credible given that no one really wants to hold a bond yielding a lower rate than the overnight rate. Nevertheless, any form of mitigated demand should make not only bond holders nervous, but equity investors, as well. Glancing at charts of TLT and the U.S. Dollar Index, bonds appear to have peaked in early June and the dollar in early November. Bonds have enjoyed a small rally for two months into mid-January, but if the slump of the latest week continues to new lows along with the dollar, the odds become much greater that a stock market top is already in place. I'm not saying this will happen... just something to keep an eye on.

Something I did say will happen may have got its first leg today. Silver broke out of a 3-week sideways pattern, jumping decisively to the upside. Today's 3% pop may be the beginning of the spike in metals prices I've been anticipating. I added a small position in Pan-American Silver to try to capture some of the run. I would have opened a larger position if gold had set a new high along with silver, but there is time for that. I would rather be adding to my position at higher prices with higher levels of confidence than tucking away a large position at lower prices if things don't quite work out the way I expect.

Housing stocks took some lumps today on the heels of the Centex earnings report in which the company stated they see demand slowing, but nevertheless expect to meet previous earnings forecasts. Traders espied the apparent contradiction and sent Centex shares down 3.4%. Most of the other homeys saw losses between 1-2%, which may also reflect concern over bond prices. My only housing-related position, a short on Building Materials Holding, lost some ground today as SunTrust decided to initiate coverage on the company with a buy. It seems preposterous to be recommending the shares of a company whose primary customers are all talking about slowing demand. But that's just my humble opinion.

Disclosure: Long PAAS; Short BMHC; Long PAAS Calls


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