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February 23, 2006

Undercurrents

On the surface, today's stock market was rather drab. The major indices drifted sideways for most of the session, and then closed weakly. Google was up $12, but its rise appears to be a rebound from the most oversold position in its short history. Therefore, not much should be read into the bounce. If you have the fortitude to hold through this stock's massive gyrations, a short will likely do well over the intermediate term. However, that's not for me. I think the story is equally weak for Yahoo, and I prefer to play the less volatile of these two spec stocks.

Metals seem to have calmed down in the last few days. Both were down a modicum today, but the miners were hit with a larger bout profit-taking. Pan-American slipped 2.5% while Newmont was down 1.6%. I've written recently about not having a short-term read on metals, but that doesn't mean I don't have a plan. Observe the chart of PAAS below. Pan-American was locked in a trading range for over two years and recently broke out of it on high volume.

stock graph

While a pull-back from the breakout surge can be expected, it's highly doubtful that the shares would lose the $20 mark. The $20 level could be tested, but there's no guarantee of such a test. Therefore, my strategy is to sit tight. If PAAS continues up, great! If it pulls back and tests $20, it would be a low-risk entry point to add to my positions. The Newmont chart can be studied similarly, with $50 as support.

The GSEs rallied today on a report released by Senator Warren Rudman, placing blame for Fannie's accounting fraud on the company's former CFO and comptroller, but stating that Franklin Raines was unaware of the malfeasances. To propose that two officers who report directly to the CEO could pull off such a large-scale fraud without the knowledge of the CEO is preposterous. Raines' political clout is obviously still pulling strings and doing so at the expense of the shareholders of corporate America. Where are the efforts toward rebuilding the credibility of our regulators? This report is a slap in the face to investors and undermines any confidence that may have been offered by Sarbanes-Oxley.

My rant aside, both FNM and FRE rallied today, presumably because the report did not reveal any more accounts of fraud. I suspect that this "good" news, as empty as it may be, will turn out to be one of those cases where good news marks the top of a run.

Disclosure: Long YHOO Puts; Long PAAS, NEM Calls; Short FRE

 

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