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February 7, 2006

Sell Everything!

Today was not a good day to be long anything.

Metal prices melted away steadily for the largest one day drop since April 2004. The charts were struggling to go higher and were due for a setback, but the magnitude of the move took a lot of people by surprise, myself included. Silver slipped nearly 4% and gold fell 3%. Miner shares fell in commiseration, with Newmont and Pan-American off 7% and 8%, respectively. As I noted a few weeks ago, volatility in metals prices will be rising along with the prices. The big question for traders right now is whether this drop is the beginning of an April '04 event or just a temporary setback. Personally, I suspect the latter and will be looking to re-deploy cash raised from selling some of my calls last week.

Housing shares plummeted after Toll Brothers cut their forecast for home deliveries from 9,500 to 10,200 down to 9,200 to 9,900. Do the math and you see this is only a 3% cut, but given the negative psychology in this sector, reactions get amplified. Building Materials Holding, a supplier to the home builders and a company I have profiled, released 2005 earnings this morning. The results for the whole year were spectacular ($8.82 vs. $3.87), but 4th quarter earnings missed by a bit, and the shares got punished. Of course, Toll's reduced sales forecast doesn't help. Reduced sales means reduced materials purchases and therefore reduced earnings for BMHC, which is exactly the case I've been making all along.

Revisting the chart I posted a couple days ago, we can see that BMHC escaped its wedge on high volume to the downside.

stock chart

I anticipate further declines on the heels of this break, but always on the defensive, I have moved my stop down from the moving average to the shoulder line (green).

The energy sector also took a beating today as oil fell $2. I have been reticent to open an oil position simply because it seemed too much premium was being built in over Iran before anything substantial actually happened. The market was ripe for this pull-back. Oil may have some support here at $64, but it's a difficult read. Since my outlook on oil is currently neutral, I am going to trade in that sector only if I see an opportunity that seems too good to pass up.

The next few months are shaping up to be very interesting, at least if you like volatility. Throughout 2005, the markets were buoyed by a degree of certainty. There was no doubt about Fed policy as each meeting approached (or even a couple meetings ahead). Geopolitical events were relatively tame, and earnings were coming in more or less as expected. We now have much less foresight regarding Fed policy. The geopolitical landscape has become tumultuous, and earnings have already thrown some serious sinkers. These condition are not exactly the ideal backdrop for stable... or rising... asset prices.

As a closing note today, I highly recommend a read of Marc Faber's latest market comments.

Disclosure: Long PAAS, NEM Calls; Short BMHC


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