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April 17, 2006

Precarious Perch

Gold and silver exploded... again... and sit at new quarter-century highs as measured in nominal dollars. The metals gained 3% and 4%, respectively and finally kick-started the big miners. Newmont Mining shares surged 6% while Pan American Silver jumped 2.6%. The more gold and silver rise, the more reality sets in with regard to the precarious perch of the dollar, and the more irritated I get that my financial wealth is measured in those dollars.

Speaking of precarious perches, stocks stumbled in a day that appeared to fit very well into a market rollover scenario. The selling occurred in the face of rocketing commodities prices… a scenario I expected for the next big market drop. There was also just enough buying into the close to work off short-term oversold conditions, opening the door for more selling tomorrow. Perhaps I'm only seeing what I want to see, but this sell-off looks and feels much different than every dip we've experienced since last spring.

Tech appeared to be hardest hit, with the NDX off a full percent. Intel, one of the largest NDX components, set a new 2-year low, and this widely-held company is bound to set off some fireworks one way or the other when it reports on Wednesday. In fact, a lot of today's action could be written off to jitters over a big earnings week, but such skittishness is justified. In the case of Intel, overcapacity problems in combination with stiff competition from AMD are ringing a death knell for profitability. I believe the January earnings miss for this company was just the first in a series of bombshells it will drop on its shareholders in coming quarters.

Yahoo also reports on Wednesday. While I am less pessimistic over their current prospects than for Intel, Yahoo does face growing competition, and should we experience the recession I expect on the heels of the housing bubble's demise, ad revenue will plummet. Although I believe this process is already underway, Yahoo may manage to pull one out of their hat this quarter. January's disappointment was so large, it seems possible they built enough of their problems into that report to make this quarter look good. I'm only mentioning the possibility as a point of caution because my bets are quite the opposite.

Disclosure: Long NEM Calls; Short INTC; Long INTC, YHOO Puts

 

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