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September 20, 2005


One way to surprise people is not to change anything. The Fed, as expected, chose to hike the target for the Fed Funds rate another 25 basis points, as they did in their previous 12 meetings. The Fed also chose not to change their language to signal an end to the rate hikes. The status-quo on future rate hikes was not expected, and the markets let Mr. Greenspan know about it, turning a half-percent mid-day gain into about three-quarter percent losses by day's end.

Particularly hard-hit were housing stocks. Centex (down 2.4%), Toll Brothers (down 6.2%), KB Homes (down 4%), and Hovnanian (down 3.2%) all experienced accelerated sell-offs after the Fed's release.

Surprisingly, gold and silver did not sell-off heavily. Perhaps precious metals traders are more focused on the US deficits, as they should be. The PM bull run could prove to be phenomenal once the Fed quits hiking. It seems that a major psychological shift has occurred with regard to precious metals and perhaps with stocks, as well. Only time will tell, but I'd like to pass along a bit of wisdom I read from a technical analyst recently. He noted that the third wave of bull markets, which is what we could be entering now with respect to precious metals, is where the crowd tends to be right. This revelation means that one should be very wary of playing the contrarian for the next few years in precious metals. We could be entering the stage where "buy the dip" is all one needs to know how to do to make money.

In the meantime, we all keep an eye on Hurricane Rita, hoping the storm doesn't wreak more havoc on our oil drilling and refining infrastructure. My suspicion is that the market's reaction to another storm in the gulf is a little overblown (no pun intended), and that oil prices will move downward if the storm passes away relatively harmlessly.

Disclosure: Short CTX; Long TOL Puts


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