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May 25, 2006

Undignified Rally

Well, it wasn't explosive, but it was a rally. Since the middle of yesterday's session, we've seen a little more than 2% recovered on major indices. The rally seems a bit timid, and this may be due to traders' reticence to commit to the long side going into a holiday weekend. Perhaps if key politicians keep their traps shut and traders are able to relax without any disturbing developments on the global economic front, we will see some substantial strength on Tuesday. As for tomorrow, I would be surprised to see much enthusiasm ahead of the long weekend.

The action has not inspired me to take on any shorts, but I've been kicking around the idea of opening a trade in Pan American Silver or Newmont Mining next week ahead of the June 4th elections in Peru. A couple of knowledgeable contacts I have in SA say that a Garcia victory is almost certain. Defeat of the leftist Humala may allay fears over nationalization of the large mines the two companies operate. The trick to these types of trades is discerning how much expectation is already built into share prices. If there is a general consensus that Garcia will win, his victory may produce almost no upside for PAAS and NEM, whereas a surprise win by Humala would hit the shares hard. I'll keep you posted on how I read this situation.

Yahoo and eBay made headlines this morning with the announcement of a pact to exchange services. Yahoo will become the exclusive ad provider for eBay's site and eBay's PayPal service will become the exclusive payment services provider for Yahoo stores. It's a wonderful idea for both parties, though I doubt the deal is worth the 12% added to eBay's market capitalization. Neither company will see substantial impact from the deal for at least a year. Both stocks were likely ripe for bidding, and the news provided a good catalyst. I'm not too keen on shorting eBay, but I may add to my Yahoo position soon. Along with Google and Microsoft's MSN, the big three will probably kill each other's margins once the online ad business experiences its first bout of cyclical behavior.

Confidence in capital market regulation took a small step forward today with the fraud convictions of Enron's former top goons. We can take a bigger step once these two fraudsters actually see some jail time. What these guys did, assuming the convictions are valid, is peanuts to the economic damage wrought by Franklin Raines at Fannie Mae. I would be shocked if he were ever issued a warrant, let alone a conviction, so let's just enjoy the Enron convictions while they're still hot off the press.

Disclosure: Long YHOO, GOOG Puts


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