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November 21, 2005

Speculative Premium

A theme dear to heart showed some mettle today, and the pun is intended. I have previously discussed my theory of why mining stocks have under-performed gold and silver for the passed year. The premise of my idea is simply that in late 2004, mining stocks sported a speculative premium on the backs of rocketing metals prices. As the PMs faltered early this year, the bulk of this speculative premium unwound from mining shares. The effect was exacerbated by rising energy prices and fears about how this cost would impact the miners' bottom lines.

I continued by suggesting that not only would the next run up in PM prices reinforce traders' previous convictions about mining shares, but also amplify the speculative premium as it got built back into share prices. Should energy prices simultaneously fall, which I also offered as a likelihood, the next move in mining shares would put the '04 run to shame.

The reason I bring all this up is that mining shares grabbed a bit of that premium today, with the likes of Pan American Silver up over 5% and Newmont Mining up nearly 2%. Both stocks are still below their 2004 high while the shinies have set new highs. If I am correct about the speculative premium thesis, it is not too late to get in on the action in mining stocks.

Speaking of speculative premiums, Fannie Mae continued a bounce that began in early October and has now tacked about 20% to its stock price. Ironically, the bounce began just a couple days after the stock took a 10% hit for revealing yet another bit of scandalous accounting. Despite the rally, the stock is still neutral in my technical oscillator, and could rally further. In addition, if there were a list of stocks that would be subject to year-end tape-painting, FNM would be near the top. Many big money managers face embarrassment (and perhaps should face charges) for owning a stock with no discernable financials. I intend to continue waiting patiently for a new opportunity to short this one.

Disclosure: Long PAAS, NEM Calls


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