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June 29, 2006

Moderated Growth

FOMC members packed a load of fireworks in their briefcases for June's FOMC meeting and sent markets soaring. Everything hinged on a comment about the economy which refers to an unspecified "recent indicator" that suggests "economic growth is moderating from its quite strong pace earlier this year." How convenient is it that this mysterious indicator is "recent" so that these clowns can backtrack on all the inflation rhetoric they've been feeding us? Eternally optimistic traders interpreted the statement as a sign that the Fed is done with this rate hike campaign, and stocks went vertical into the end of the session.

The Federalies went on to state that "although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the committee judges that some inflation risk remains." Whatever. The Fed knows it's in a trap and is speaking out of both sides of its mouth. Despite their backtracking, one thing they said is definitely true: their future action will be data dependent. What they didn't tell us is the only data point that matters is how much they think they can get away with while still saving face.

Nothing was spared from the bulls' devouring appetite this afternoon, and the biggest winners were, by far, the miners. As a group, mining shares rocketed 7%, and my pair of favorites, Pan American Silver and Newmont Mining, both gained roughly 6%. The underlying metals also did quite well, with silver up 5% and gold tacking on over 3%. Have the metals turned upward for a run to new highs? It is difficult to say at this point. Macroeconomic transitions tend to be lethargic in their unfolding, so I wouldn't be surprised to see PMs move sideways to upward for a few weeks and then experience another breakdown before launching to new highs. We'll just have to watch carefully and make "data dependent" decisions.

While this afternoon's rally looks impressive, I expect it to fizzle out. Part of the impetus behind the move may be related to end-of-quarter window dressing by funds. Perhaps they wanted to wait out the Feds just to be sure a surprise half-point hike wasn't in the cards before tailoring their returns for Q2. If this is indeed the case, markets could turn lower as soon as Monday. I intend to stick with my plan of looking for enticing points to build my shorts starting next week.

Disclosure: Long PAAS; Short PAAS, NEM Puts

 

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