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May 18, 2006

By the Way, We Have Inflation

Bulls held the line today until the last half hour of trading, when we dove to new lows for the year, at least for tech-heavy indices. The bull case was certainly not helped by words from Fed President, Jeffrey Lacker, who said the Fed is less likely to pause, considering recent inflation numbers. These clowns have been breaking their own arms patting themselves on the back for taming inflation, and suddenly they think it is a risk.

While we ridicule them, I actually think it implausible that they haven't foreseen the inflation risk. Public statements by Fed officials are little more than an orchestrated PR game. We heard several governors hint that hikes were almost done while, in fact, several more increases lay ahead. The very act of a governor publicly talking about the need for more hikes makes me believe we may, indeed, be approaching the end of the hike cycle. Perhaps "one and done" is valid now. This line of thought has been effectively negated, though, so I expect further realignments in equities and commodities up until we get to the "done" part. Therefore, perhaps after a couple more Fed meetings, we will witness the next phase of my playbook in which commodity prices skyrocket while equities continue to languish.

Silver was hit particularly hard today, losing about 3.5%. Gold slipped a little over four bucks, and the miners got punished for another 2%. Pan American Silver shares are now down for the year, and Newmont Mining has seen a week-long freefall. It is tempting to buy at prices that once seemed like steals. I suppose if you have a several-year horizon, today's prices would be bargains, but I have simply not seen what I want to see to be comfortable getting long just yet.

As for the rest of the market, there is not much new to say. Bulls are anxiously awaiting a sign that this sell-off is just a temporary correction, and anyone who has bought into this weakness has been toasted. I imagine that one day soon we will see a sharp rally to draw in some of the bullish hold-outs who will subsequently be dropped in hot oil. After all, bear runs are typically littered with sharp counter-rallies. I hope to properly identify these counter-rallies and trade against them.

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