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November 28, 2006

Gettin’ Down with the Homes

Equities took a breather from yesterday's selling and now look poised to put in the bounce I discussed yesterday. With the dollar continuing to edge lower... down nearly another half percent today... I don't expect any bounce to be long-lived. Unless the markets explode to new highs, I will be viewing any upside action as a head fake and will be looking for points to fade the action with additional shorts.

Precious metals were in disagreement over the dollar's action. Silver popped an impressive 23c while gold was down a buck or so, though for the most part, mining shares rallied. This divergent action doesn't mean much... probably just a one day fluke. I suspect the action in both metals and miners will become more volatile as we enter 2007 with the net result of much higher prices this time next year.

Back in June, I correctly surmised that metals would move more or less sideways for several months and so the appropriate action was to sell puts to capture what was then a high level of volatility premium. The move worked out grandly. At this juncture, I am contemplating purchasing calls in order to capture not only an upward move, but what I expect to be a large inflation of volatility premium. Given that metals have been on a tear for two months, I probably won't make my entry just yet, but I'll keep readers posted on how this line of thinking progresses and, of course, when and if I make a move.

On the housing front, we heard from the NAR regarding prices of existing homes for the month of October. The news was a bit of a shocker, even for housing bears. The median sales price was down 3.5% compared to last October. For those of us used to 5% daily moves in our favorite stocks, a yearly 3.5% change doesn't sound like much, but it is actually the largest year-over-year drop in home prices ever recorded on a national scale. This news is significant. It means this downturn in housing is more serious than most anticipate, and it renews my confidence in shorting the homeys again at some point. I am simply waiting for a nice technical setup.

Anyway, the spinsters were at it almost immediately. MarketWatch grabbed onto another data point in the report... the fact that the number of existing homes sold ticked upward for the first time since February... to post a headline on their home page that read something like "Housing market stabilizes." That is like saying the bear market in tech was done on any up day in 2001.

The news continues to deteriorate on many fronts. I am reading and hearing whispers that holiday shopping is not so brisk as the 19% sales increase reported Friday may indicate, and that the surge in sales over the weekend can be attributed to the ridiculously aggressive specials being run. We'll have more data Thursday when many retailers fess up to November sales figures. In the meantime, we have a GDP number and new homes sales data, both tomorrow, as potential catalysts for market movement.

Disclosure: None


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