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March 31, 2006

Out Like A Lamb

March ended with a whimper as equities traded very narrowly today and went out about even. Miners were under a bit of pressure as metals gave back a modicum of the week's gains. Gold's break to a new high has forced me to reconsider the immediate potential for metals. As a result, I decided to repurchase a small position in Newmont Mining via call options. Should a continued breakout in gold fail to materialize, I will accept a small loss in the trade. However, if this move by our little yellow friend turns out to be valid, I believe NEM shares could move rapidly back toward highs, making the trade very profitable. In other words, the risk/reward ratio here appears to be favorable.

Housing-related equities were under a bit of pressure, although the homeys themselves were mixed. Freddie Mac fell 2.5% after providing an estimate of 2005 earnings. I find it perverse that the company, due to ongoing accounting problems, can only report an estimate of earnings. Although there was nothing particularly alarming in Fred's release, the mere fact that it was an estimate instead of an actual earnings report reminded traders of the problems they are suffering, and the shares sold off. I continue to believe that both Freddie Mac and Fannie Mae will set new lows during the course of 2006, and I feel naked not being short.

On the construction side of the housing market, my favorite stock to short, Building Materials Holding, shed 2%. The shares once again bounced off the underside of the moving average (I use 85-day for the BMHC chart), and if we see a pick up in downside volume early next week, the shares should project to new lows. The homebuilders themselves were non-eventful today, but the charts are looking weak. I may begin to dabble on the short side with them next week.

Now that the FOMC meeting and EOQ diversions are out of the way, we can get back to the regular flow of things. How the market behaves during the first few days of April will be a clue, I think, to the near-term direction of the market.

Disclosure: Long NEM Calls; Short BMHC; Long BMHC Puts


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