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April 12, 2006

Mid-Week Nap

Today's equity action was characterized by somnolence, and I don't expect much of a change of pace tomorrow since a 3-day weekend follows. Few sectors saw significant movement, though one group that stood out was home builders, which fell 1.5%, collectively. The Mortgage Bankers Association's weekly home purchase index continues to expose a weakening market. Hardest hit within the group were KB Home, down 2.7%, Pulte, down 2.0%, Centex, down 1.8%, and Toll Brothers, down 1.6%. Many of the home builder charts look like they're ready for another spanking. Behind the scenes, bonds got drubbed, and the 10-year Treasury is flirting with 5% again.

Silver gained a paltry 11c… a rather drab day compared to recent action… while gold was flat. However, large miners finally caught some bids with Pan American Silver and Newmont Mining up 4.4% and 3%, respectively. With gold and silver charts looking like they could go absolutely wild, I still can't convince myself to get aggressively long. One possible path I see for metals prices involves a sharp pull-back as traders become afraid that the Fed's tightening cycle is not finished after all. The fear reverberates throughout the markets, sparking a crisis in the derivatives market and/or housing arena, and forces the Fed to suddenly cut aggressively. Then metals go wild. Then again, perhaps my imagination is just getting the best of me. We'll see.

Speaking of crises, I highly recommend Jim Jubak's article on how General Motors could spark a derivatives crisis.

On the retail front, Circuit City shares were launched 8% in the wake of its earnings report. Their 2006 earnings figure blew away estimates, primarily driven by sales of wide screen TVs. Though the company lowered first quarter 2007 expectations, they conveniently said that full-year earnings should easily beat current estimates. I'm not surprised to see retailers still reaping the rewards of the housing ATM. Equity extraction has slowed, but it is not yet gone. However, any trader who expects to see more of the same over the next year or two is simply deluded, and I expect retailers to begin missing numbers badly by early next year.

Today's jaunt in CC's share price shows that bulls still have some firing power, but also provides opportunity for bears to short at higher prices. CC now sells for 35x TTM earnings. A back-of-the-napkin calculation tells us that earnings shortfalls combined with a multiple contraction could put these shares back in the single digits down the road. The trick to winning this game, of course, will be timing.

Disclosure: Long NEM Calls; Long TOL Puts


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