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September 11, 2006

Metals Bashing

Elation. Celebration. Vindication. These are not words one expects to hear from a gold bug on a day precious metals are clobbered, but since I have been patiently sitting on the sidelines waiting for another big swoon before rebuilding positions, I could not contain such glum feelings. As I have written many times, it simply did not make sense for precious metals to angle back up to new highs directly after the May-June blow-off. Another sell-off strong enough to shake out weak longs made sense to me, and we are witnessing the shake out now.

As for the impetus for the slump, there are several theories, including central bank selling, interest rate fears, and an outright declaration of the end to the commodities bull market. This last bit of nonsense comes from Stephen Roach of Morgan Stanley, who is frequently quoted in major financial news outlets. Mr. Roach views the 5-year run in metals prices as a bubble and says, "The mega-run for commodities has run its course." At some point in the near future, I hope his clients heed his advice and sell their gold to me.

I do not think metals will go down much further, but that does not mean a big rally is about to begin. Side-winding is, in my view, the most likely path for the interim leading to the next big rally. Perhaps choosing points to execute a slow accumulation will be the best strategy.

Naturally, the miners were slammed along with the metals. Pan American Silver shed 8%, while Newmont Mining lost 5%. NEM shares failed the triangle formation highlighted in Friday's post, but did so on high volume. Downward breaks out of triangles are more reliable when accompanied by low volume. At this point, I am remaining patient. The next support for Newmont appears to be $42. I don't know if it will fall that far, but buying now would be like trying to catch a falling knife. I prefer to wait for clearer waters.

As for equities, markets saw solid selling in the opening hour, but the eleven o'clock buy programs kicked in and sharply erased those losses. No doubt, conspiracy theorists will have fun claiming that the imaginary PPT would not let the stock market fall on the anniversary of 9/11. However, the upside action appeared to be solely related to the unwinding of an intraday momentum divergence. In fact, I dumped my largest short position... a short on the S&P itself... just before the rally commenced. It certainly would have been nice had I covered more of my shorts, but I have an aversion to trying to be too cute with trades, as it usually results in me faking myself out of good money.

Chip stocks saw solid gains in the wake of news that two private equity firms are looking to buy Freescale Semiconductor. M&A activity tends to occur at either the tops or bottoms of an industry's economic cycle, so this development hardly negates my view that chip companies are poor values. Nevertheless, it illustrates one of the big dangers of shorting stocks, even when it seems obvious to do so. The news also set fire to like-sized semiconductor shares such as Nvidia and Micron Technology. Speculators obviously believe that whomever comes away empty-handed from the FSL bidding will chase one of these others.

Retailers also came under heavy bidding today, gaining nearly 2% as a group. The strength here seems to be driven by the presumption that plummeting gas prices will bring consumers back to the stores. I have serious doubts about the validity of this line of thinking. Home equity has been fueling consumption, not fuel. Nevertheless, the mentality is strong enough to drive consumer shares higher for now. Let's see how these shares respond later this week after the publication of a couple of important retail reports. The reaction will give us clues as to what comes next.

Disclosure: Short NEM Puts; Long FSL, NVDA Puts; Short NVDA, MU


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