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December 15, 2006

Spin Doctors

Wall Street's obsession with interest rate policy continued this morning when stocks reacted to a tame inflation report by breaking sharply higher. November's CPI came in flat, and no inflation means no need for further rate hikes. In other words, we experienced the 4,352nd Fed-is-done rally of the last two years. I wish the Fed would go ahead and cut so we can get on with the selling. In any case, stocks settled down as the session wore on, but as always, it is difficult to distinguish between significant action and options-related movement on expiration day.

The wishful thinking rampant in traders' minds was exemplified by the bashing suffered by metals. The same news that sent stocks higher... by way of implication that the Fed won't hike again or perhaps will start cutting rates... also sent precious metals lower. No inflation, I suppose, also means no need of protection. It is here where the misinterpretation of inflation is most apparent. It is quite ingenuous to measure inflation purely from a price standpoint, let alone believe the numbers published by the government. Inflation is a monetary phenomenon, and although it will cause price distortions, it cannot be accurately measured via prices because prices will change as part of the economic cycle independently of central bank activities.

It is a topic that requires more ink than I am willing to bleed today. The bottom line is that Wall Street continues to interpret news to fit its mold of a soft landing for the economy and its omniscient view of the Federal Reserve. Wall Street is engrossed with the Fed, and this misplaced focus distracts attention from what is occurring in the trenches of the American economy. Even as the manufactured inflation number was being published, Black & Decker shares were getting slammed as the company provided yet another data point indicating that consumer demand is sharply weakening. From the BDK CEO: "The demand environment has weakened compared to recent quarters. In addition, orders from key retailers have decreased much more sharply than sell-through. Therefore, our U.S. sales have been significantly lower than we anticipated."

At some point, the economy is going to matter to share prices on a broader scale, and when Wall Street's self-delusion starts unwinding, no dose of Fed policy nor handfuls of Zoloft will save the bulls.

As for precious metals, they may have been due for a pause. The CPI simply provided an excuse for a healthy dose of correction fluid. Miners were down in commiseration, but not as much as one would expect on a near 2% hit to gold and 6% on silver. As for Newmont, its shares experienced a sharp late-day recovery to close down only a few cents. I do not know if this action was related to options expiration or poses a deeper meaning about NEM's potential, though I would guess the former.

I want to add to my metals positions, and today's action may indicate that an opportunity lurks. However, I think a safer... but not necessarily cheaper... entry point can be found, meaning I want to see more signs that my view is correct before pulling the trigger, even if I have to pay a higher price for that security.

Disclosure: None


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