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January 31, 2006

Google Eyes

I write a lot about judging market psychology based on how the market reacts to different events and situations. Reactions are more important than the news itself. This passed Friday I was surprised at how strong the market performed going into the weekend, given all the political uncertainties. I interpreted the strength as a sign that the bulls may still be in control. Coming into today's FOMC meeting, attitudes on the street were strongly indicative of an expectation that the Fed would provide language suggestive of the end of rate hikes.

In fact, they did quite the opposite, not only leaving the door open to more rate hikes, but actually stating that another hike is already in the cards. One would expect a sell-off in the face of this language. However, equities held firm. The market's reaction to the news could be interpreted as strength for the bulls. On the other hand, it could simply be misjudgment on my part about what expectations were. After all, interest rate futures market had already priced in a 70% chance of a rate hike in March.

I have also observed delayed reactions to Fedspeak in the past, so a negative reaction to the Fed could very easily come tomorrow. Unfortunately, such information is lost to us because as I write, news of a huge earnings miss by Google is coming across the wires. After-hours Google trading appears to be halted, but if Yahoo's reaction to the Google miss (YHOO is down 5% after hours) is any indication, then GOOG is in for a walloping. It will be impossible to distinguish what may have been a reaction to the Fed from what GOOG shares may do to the market. A miss of gargantuan proportion by a market bellwether could very well be the catalyst for the market unwinding I've been expecting.

Gold and silver edged up, but once again silver outperformed gold. Miner shares enjoyed a huge day, fueled by Mad Money Jim Cramer touting Pan-American Silver last night. Though I have to give him credit for actually recommending the company, he's only a couple years late. His reasoning was also flawed. He stated that PAAS has been under-performing GLD, and therefore should play catch-up.

Now, I gathered all this information second-hand... I've never seen his show... so someone correct me if I got the story wrong. In any case, PAAS under-performing GLD is no reason to purchase PAAS. First of all, PAAS is a silver miner, not a gold miner. Second, there is no rule that says gold and silver move in proportion to one another. Third, GLD is an ETF whereas PAAS is a miner, so even if PAAS were a gold miner, the two would not move in proportion.

That said, thank you Mr. Cramer for the spike in my long option premiums.

Disclosure: Long YHOO Puts; Long PAAS, NEM Calls


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