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November 22, 2005

Long History, Short Nouveau

At the risk of sounding un-progressive, I would like to suggest, in jest, a trade for the ages. The "ages" being represented historically by the time-honored store of wealth, gold, and the nouveau form of wealth, Google shares. With Google trading in the low $400s and gold dancing in the high $400s, a situation that was nearly unthinkable 11 months ago is now only a couple of 10% moves away: parity between one ounce of gold and one share of Google.

The trade, should these two prices reach parity, would be to buy history and short nouveau wealth. Imagine shorting 100 shares of Google, then taking the proceeds and purchasing 100 ounces of gold. Where will such a trade place the executor in one year or three or five years? If a trader had taken this bet at the beginning of 2005, said trader would be peddling for coins on 6th avenue by now. The roughly 10% gain in gold would have been clobbered by the double in Google shares. However, this trade is only interesting at parity, which we still await and may never see. If parity should occur, I will execute the hypothetical trade and follow it on the home page of The DOCument, and we'll see where our faux trader ends up.

Today's market action was about as dry as yesterday's. Equities opened weak, then ground slowly higher. Headlines on various financial news web sites blamed this morning's initial weakness on higher oil prices. In my eyes, these postures were yet another case of the media taking a prominent piece of data for the day and using it to try to explain the stock market's behavior, even though the two markets likely have no intraday correlation whatsoever. It's almost laughable to see these people continuously suggest a short-term inverse correlation between oil prices and the stock market. Anyone who watched both stocks and oil rally sharply during the summer should know such an idea is bogus. But I guess if you're a journalist, you have to write something, and if most financial journalists didn't have such an aversion to thought, they would be doing something else.

Now that my rant is finished, back to today's actionÂ…

Intel enjoyed a bit of a pop on the heels of its announcement that it will be getting into the flash memory business. It's rather ironic that AMD stock popped a few months ago on news that it wanted to get out of that business. AMD is certainly making the wiser move since flash memory is more or less a commoditized product. Perhaps traders think Intel can do a better job at it and/or leverage their brand name to sell it well. Or perhaps traders are just using any excuse they can find to get happy about Intel. Either way, I don't think the move will pay off that well, if at all, and I am staying short Intel.

In late October, my oscillator had Intel in very oversold territory, but I stubbornly held onto my short, thinking that perhaps Intel was undergoing a reality re-alignment. Whenever I ignore my oscillator's warnings, I usually regret it. Though the position is now 15% to the worse, I am holding fast and waiting for a bearish turn of events to add to my puts.

On a final note, a quick look at the dollar index shows a possible topping pattern underway, with a turning point about a week ago. Together with my premise that stocks are following the dollar with about a month lag, we could be looking at a turning point for the stock market in mid-December. The whole count gets reset if the dollar index sets a new high.

Disclosure: Short INTC; Long INTC Puts


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