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June 26, 2006

Notes on the News

Since the market action was dull once again, and is likely to stay dull until Friday's Fed proclamation, I'd like to focus on some interesting items in the news. The first piece that caught my attention was the announcement that Phelps Dodge would be acquiring two Canadian nickel miners. This development is encouraging for commodity bulls since it shows commitment from people in-the-know. They would not be acquiring smaller producers if there were not great potential for higher prices. Once the big producers begin merging with each other, we can start to fret about the end of the commodity cycle, but I'm sure there are many years between now and then.

The Phelps news is also personally encouraging since, as I mentioned last week, one of my reasons for owning the smaller oil producer, Encore Acquisition, is potential takeover by the big players. While there is obviously no direct link between the Phelps news and the oil industry, it at least provides validity to the line of thought.

In the housing arena, new home sales came in a bit higher than anticipated along with a median selling price about 3% above that of a year ago. At face value, these numbers seem pleasant and were good enough to give the homeys a lift in today's action. As a group, home builders were up 1.4% with stronger performances coming from Centex, KB Home, and Hovnanian. However, more information is needed to properly assess the health of the industry. Builders are offering rather impressive incentives to keep sales humming along, so the raw data on median selling price does not tell the true story.

Last week I mentioned my consideration for shorting a few of the homeys ahead of this report, but I chose not to do so. While I doubted a serious upside move could occur, I also concluded that a serious downside break was unlikely due to potential speculation ahead of this week's Fed meeting. I prefer a situation in which I perceive odds tilted more in my favor than what I saw in this setup.

XM Satellite shares experienced an interesting news flash this morning when Sirius CEO, Mel Karmazin, expressed interest in purchasing his competitor. The way the story developed was not very compelling, however. Karmazin was responding to a question posed during a Q&A session at a conference, so the expression of desire hardly came from an aggressive posture. Whether or not the question was planted, it seems improbable that Sirius would seriously pursue a purchase of its rival. They would risk wasting a lot of money on a deal that would more than likely be struck down by the Justice Department. In any case, his utterances caused XMSR to spike more than 6%, and I took the opportunity to short a small block of shares.

Last but not least, U.S. Treasuries slipped for the 9th straight day which, according to Bloomberg, is the longest losing streak since an 11-day streak in 1974. The yield on 10-year notes has risen 25 basis points during the run to 5.24%. One has to wonder when bond yields will begin to further weigh on stocks. If I were to take my best guess, I would say right after the upcoming Fed meeting.

Disclosure: Long EAC; Short XMSR


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