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June 2, 2006

Transitional Period

Today's action in stocks was about as exciting as a soccer game between Monaco and Micronesia. After a brief fake to the upside, equity indices broke downward as if to resume recent bloodshed. However, this break was also a fake, and stocks ground their way higher through the rest of the session to close more or less at par. Overall, there is not much to be gleaned from today's action. The only interesting note is the nearly 2% hit the homeys took on the heels of lowered guidance from Pulte Homes. Pulte follows Toll Brothers, Centex, Hovnanian, and others in these "measured pace" guidance adjustments. I expect to see lowered, lowered guidance later in the year, and perhaps even lowered, lowered, lowered guidance by next year on most of these names. For now, the sector seems a bit oversold, so I am keeping my hands clean and waiting for a salable rally.

Action outside stocks offered a bit more substance. First, bonds exploded. The 10-year Treasury saw its yield drop 11 basis points on nearly a full-point rally. Interestingly, bonds were pushed higher while the dollar tanked, behavior which is likely attributable to the weak jobs data released this morning. I've been expecting a near-term rally in bonds, but thought it would occur simultaneously with a rise in the dollar as traders re-priced positions based on expectations for a firm Fed. Today's divergence from this theme suggests that currency folk are more concerned with a weakening economy... at least for today. Ultimately, I remain firmly resolved that bonds will tank along with the dollar as traders flee dollar-based assets.

Commodities experienced some renewed vigor with explosive rallies in some agriculturals and base metals. I'm not sure what to make of the strength. We may simply be witnessing some buy-the-dip behavior, but without a firm handle on what's going on, I will remain an interim observer. For their part, gold and silver finished modestly higher after yesterday's bashing.

This weekend will bring results of the Presidential run-off in Peru. I wrote last week about potentially taking a position in Pan American Silver as a play for a Garcia victory. While I did sell some PAAS puts this week, the trade was not related to the run-off. Miners could see a small pop if Garcia wins, but I expect the group to move more or less sideways for the intermediate term... a perfect scenario for capturing eroding time premium, especially with so much volatility currently reflected in option prices.

This week's action did nothing to change my overall roadmap. In fact, yesterday's rally helped reinforce my expectations. I will be watching over the next week or two for opportunities to build short positions, and when it seems the strain will be too much for the Fed to bear, I will get unbelievably aggressive with precious metals.

Disclosure: Short PAAS Puts


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