Tuesday, September 19, 2006


We’re not exactly sure where to start this evening due to the number of items we would like to mention. The early morning had stock futures down a little going into the two reports we mentioned, housing starts and the PPI for August. Both of these were “Fed Friendly” numbers and the market opened much better than the early futures had indicated. With the housing starts down 6% and PPI a bit less than consensus, at least the “Core” inflation number anyway, the bond market was strong all day with the highest close since March.

The stock market had not opened very strong and did drop for about the first hour of trading. At that time the buyers came in to bring it back to the highs of the day, at least in the NASDAQ indexes. That’s when YHOO dropped its news that the quarter wasn’t going to be as good as they thought it would be. YHOO dropped from 29 to 26, about 10%, in the space of about three minutes and brought the market down with it.

The NASDAQ indexes fell about 1.25% in about the same time it took YHOO to drop those three points. After that the market traded to stabilize and actually moved up in the last hour to close down but not nearly as much as we had seen during the mid-day trading.

With the market closing on a firm note, the after hours market was greeted with good news from ORCL. During the morning ORCL traded up to about 16.60 but then fell with the YHOO news pretty much closing the regular trading day on the low of the day. After their announcement the party began such that ORCL managed to trade up over 13%, providing a lift to the broader stock market in the after hours market.

As all of this was going on, the precious metals market was not so happy about the lower inflation expectations and the drop in housing starts. For its part, the gold mining index we have been following here, HUI, lost about 4%. The HUI closed at 293.98 after being near 370 just ten trading days ago. Looking at PAAS over the same period we see it traded at 23.70 ten days ago and closed at 18.41 on Tuesday, down over 22% in just ten days. Gold itself has fallen from $635 to $570 in that same period. All in all, quite a rout in the precious metals complex for two weeks! Yes, we are still waiting but the time is growing closer.

We were hoping to discuss the inflation picture this evening but the market decided to be interesting. There is a Fed meeting and announcement due out on Wednesday that we thought we would need to mention. We think the “Fed is done” rallies are starting to get less powerful and more sold, as Tuesday’s market revealed. As far as what will happen on the Fed’s announcement, we can say that we think the news will be for continued vigilance on the part of the Fed. This will lead to a modest rally that will get sold soon after it starts. The ORCL news will bring some general buying in the early going which will probably offer the best opportunity to get the highest prices.

The key to the market will be the extent of the ensuing rally. We still maintain that the market will be contained by the May highs—pay particular attention to the SP 500 and its assault on the 1325 level. Anything less that 1325 means the Fed’s rally is weak and will be sold. Above that, we don’t think it can go above 1325, but if it does, then it will be a matter of sustainability. It is possible that the market could hold it if it can be achieved but we don’t think it can. All we be known in good time—soon after the announcement. We would recommend Selling any morning rally based on the ORCL Hype. The later possible rally after the Fed’s announcement will probably not go as high and will be trickier to sell into. We are so looking forward to this news being behind us.

Tuesday was kind to our portfolio, finally.

Dow Industrials: 11,540.91 -14.09
QQQQ: 39.85
RYVNX: 20.50
RYAIX: 23.50
RYCWX: 40.52
TLT: 88.30
BEGBX: 13.63

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