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April 10, 2006

Silver Sparkles

Regular readers know I am quite reticent to try to correlate daily price changes with the day's news. Journalists all too often try to explain market action by looking at whatever is making headlines that day when more often than not, prices are moving for their own reasons which have nothing to do with headlines. Today's 5% move in silver is an exception. There is no doubt that the spike is related to fears over how a new president in Peru will affect the mining industry in that country. There have been threats of increased taxes, retroactive taxes, and even nationalization of mines.

Both Newmont Mining and Pan American Silver have their largest mines in Peru. The fact that both stocks performed poorly… PAAS was actually down another 2%… in the face of sharply higher metals prices confirms that today's action is election-related. This behavior also verifies the premise that when investing the metals theme, it is better to buy the metals than the miners. In any case, I expect the fears over Peru's new president to be overblown and intend to build positions in NEM and PAAS when the time is right.

Equities were a mixed bag today. Some recently weak performers continued to be weak, including F5 Networks, Best Buy, Research In Motion, and Applied Materials. The bears were not able to decisively follow-thru on Friday's poor performance, but neither were the bulls able to re-establish a foothold. I still believe Friday was a potential turning point. We simply need a catalyst or two to carry us much lower. Perhaps a few disappointing earnings releases will do the trick. Although I generally do not like to open positions ahead of earnings reports, I may selectively pick a few stocks to short this season only because I believe there is a much higher probability than usual for disappointments.

Disclosure: Long NEM Calls; Short BBY; Long RIMM Puts


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