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February 21, 2007

Wake Up Call

The FOMC minutes released this morning revealed that the revered cabal considered dropping their bias toward raising interest rates during their January round up. Although the idea was rejected, the mere fact that it was considered got traders thinking about rate cuts. This theme was no where more apparent than in precious metals, which spiked nearly 4% in a powerful display that may herald the beginning of the massive breakout I have been anticipating. After all, the theory all along has been that once people realized the Fed's next moves would be toward cuts, metals would shine.

Mining shares basked in the glow coming off the metals, also gaining nearly 4% collectively. Big winners included Silver Wheaton (up 3.7%), Goldcorp (up 4%), and Pan American Silver (up 3.5%). These moves were all made on some of the highest volume levels seen this year in PM stocks, so let's see if these things can catch some momentum here.

Surprisingly, equities in general did not go through the roof on the news that additional rate hikes are less probable. Although they did strengthen a bit post-release, most indices stayed in the red for the session. Perhaps my bias as a bear is causing me to read too much into this action, but it seems this lack of strength on news that is usually bought with fervor could be a sign of waning power on the part of the bull run. We'll just have to wait and see. Certainly some sustained downside action is needed before we bears can put on our party hats.

This post would not be complete without a mention of the "surprise" earnings miss by Novastar Financial. NFI reported earnings last night and bombed their results. We're talking a mushroom-cloud level of bombing... NFI shares lost 42.5% of their value in today's trading, easily trumping the 33% shed by New Century a couple weeks ago. The only truly surprising part of this news to me was that it was a surprise to anybody at all. The housing market has been collapsing right in front of any set of eyes willing to read the news. Could the bears' frustration with the incessant rise in equity prices be explainable so simply as to say that no one is paying attention to what is occurring around them? If so, could we not see a similar dislocation in broad equity prices once reality slaps people in the face? It is certainly something to ponder.

Disclosure: Long SLW


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