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July 17, 2006

No Holiday for Markets

It seems I should go on vacation more often! In the two weeks I was tromping around the Cyclades islands, U.S. equities tanked, taking significant steps toward the scenarios outlined in my play book. Determined not to miss any of the big action, I managed to check in on the markets at least once per day and interestingly enough, returned to the U.S. with a much larger net short position. My targets were usual suspects: SanDisk, Lam Research, and index futures, among others. However, upon return I lightened up on various positions in order to take profits. I must admit that things look a bit oversold, at least in the world of tech stocks, but we are about to dive head first into a potentially attitude-changing earnings period. Anything can happen!

This week's star performers on the earnings stage include Intel, Apple Computer, F5 Networks, Motorola, eBay, Google, Yahoo, IBM and the aforementioned Lam Research. Early next week, we hear from SanDisk and Building Materials Holding. The intense selling of the last few days is likely due to nervousness over these reports. Writers at most large financial news organizations are blaming the weakness on the Lebanon-Israel conflict, but these reporters are only working in their usual mindless manner of taking top headlines and ascribing market action to the news. Do people really think SanDisk shares have fallen 25% this month because of problems in the Middle East?

Having taken my vacation as an opportunity to reassess the big picture, I concluded that no reassessment is needed at all. Equities are in for a period of severe pain. Housing stocks have been crushed. Tech stocks are firmly in deflation mode, and banking and consumer stocks are close on their heels. In addition, the concept of a tough Fed is solidly entrenched in market psychology. This idea will likely continue to put pressure on precious metals and support the dollar, as we saw today. However, some sort of monetary crisis will eventually force the Fed's hand and herald a powerful, new leg up for commodities.

I've written of this scenario at least a dozen times in daily posts, but thought it worth repeating because a once-in-a-lifetime buying opportunity in commodities may be at hand in coming weeks should this scenario play out as expected. The trick for capitalizing on the opportunity is to be patient, but nimble. In the near term, though, the highest probability play seems to be shorting stocks.

Disclosure: Short LRCX, INTC; Long SNDK, INTC, BMHC, GOOG, YHOO Puts


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