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October 19, 2006

Having the Mettle to Stick With Metals

It was a great day to be long anything preciously metal. The dollar got creamed for nearly a percent against other fiats, sending gold and silver soaring 1.5% and 2.7%, respectively. Miners took their cue and delivered 3% gains, with my two favorites, Pan American and Newmont, surging 4.1% and 2.7%. The big move I contemplated in Monday's post appears to be in full swing. Let's see if it can catch some momentum.

Equities were contained in a very narrow range this session, failing to reach a new intraday high, as measured by the S&P 500, for the first time in nearly two weeks. I firmly believe that major indices could start breaking down hard as early as tomorrow, but probably no later than the first of November. In fact, the intraday highs put in yesterday by the SPX and Dow were set with conditions indicative of a potential top.

Please view this prognostication with cynicism as it is quite difficult to call tops. I am simply noting what my instinct and reason are telling me, which is what blogging is all about. However, I intend to begin getting aggressively short again, probably via SPX puts and some select stocks. With both the dollar and bonds breaking down, the SOX in free fall, and earnings reports that have been less than gratifying, psychology could catch a big shift at any time.

Apple delivered blowout numbers on the back of iPod and Mac sales. The sales levels surprised everybody and helped the company increase cash 25% year-over-year. There is no doubt that Apple is a well-managed company, which is why I have been reticent to attempt shorts ahead of their earnings announcements. However, valuation has to be a big question at this point, especially since Apple warned that earnings would have to be restated in light of mishandled stock options accounting. The restatement would result in a "significant readjustment" according to the company. In other words, the earnings figures reported today are meaningless. Such trivialities did not stop impetuous bulls from pushing AAPL shares up 6%.

AMD shares got slammed 13% when they revealed gross margins were being crimped by their price war with Intel. This situation goes to show how a well-run company can be hurt by a misbehaving competitor, especially when that competitor in 8 times larger. AMD will be a screaming buy once the industry is cleansed of excess inventory, thereby giving all players a bit of pricing power. I'm afraid those days are a long way out.

Tonight we hear from Google and SanDisk. Since the overall market is not in breakdown mode, yet, I have decided to remain an observer when it comes to GOOG. The fickleness of bulls these days concerns me that even a bad report by this superstar could be bought. SanDisk, on the other hand, has been one of my favorite shorts due to their own massive inventory problems. While I did not find an excuse to short the shares ahead of earnings, I am sitting on a pile of puts.

Disclosure: Long PAAS, NEM; Long NEM Calls; Short NEM Puts; Short INTC; Long INTC, SNDK Puts


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