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January 23, 2009
 
More of the same?
Still think the stock market has further to fall...
 
Like everybody (including the powers that be), all I really have are blind guesses as to how the global economic crisis is going to play out. And I assure you, even though last year I seemed to have it "right" has nothing to do with whether I will do so in 2009...Nevertheless, here are my ideas and observations...
 
For several months I have repeatedly heard the same thing from every retail stock broker I talk to: Nobody is doing anything in stocks or mutual funds. Nobody is buying. Nobody is selling...Again, not ANYTHING. Yes, there have been some dribbling liquidations and occasional stabs at bottom picking in bank stocks, but in general, the investing public is still just sitting on their severely decimated portfolios, not believing what has happened and HOPING the worst is over...which is NOT a good sign. As I essentially observed and wrote the same thing last June 22nd, I'll just reprint a quote from that newsletter: "At brokerage houses, nobody is either buying or selling...just waiting...doing absolutely NOTHING. As a trader, this tells me one of two scenarios is coming...Either the market, right now, is a roaring buy and somewhere down the road you will see everybody clamoring to get in after a 2000-3000 point rally...or...the market is going in the tank and somewhere down a far nastier road you will see the brokerage house phone lines overloaded with people selling everything they have...I hate to say it, but I think it will be the latter."
 
So the situation is very much the same still...Everybody still just sitting, not believing what has happened, only the Dow is now roughly 4000 points lower and the news has become almost exponentially worse...While this doesn't mean we are going to have the same nasty outcome, when I also see and hear, everywhere, talk about the "bottoming process", or "just testing the lows", or "historically, the average bear market/recession only lasts x months", or "PE's are back in line", or "there's a ton of cash on the sidelines"? When I hear all those clichés, again, EVERYWHERE, I can only conclude the market is most likely NOT at its low...Yes, everything the government is doing and going to do will eventually result in an upturn in the economy, and the equities markets, but I suspect that upturn is much further off in the future than most "experts" expect...
 
The markets are made up of players (buyers and sellers) and in the end, the mass actions taken by those players are what really determine where any market is going. In my mind, no markets are ever at equilibrium, but are in fact constantly swinging between extremes in price and extremes in emotion, and as dismal as everybody now feels, I still do not think we have reached the emotional extreme where the fear of "losing everything" finally drives investors to do what I referred to last June 22nd...which STILL has not happened in spite of the 40+% decline in the Dow...that is, get on the phone, en masse, call their broker and scream, "Sell it all!!"...Understandably, this sort of action usually takes place AFTER the market has cranked out a monster few down days or three, and unfortunately, the majority of average investors therefore end up selling "the low tick".
 
I certainly may be dead wrong, but I believe the stock market is, at a minimum, 1500-1800 maybe shockingly fast points away from its next big low...with a target somewhere in the mid to low 6000's...For one, with the world economy definitively in worse shape than most of us have ever seen, or imagined possible, I would at least expect to see the Dow take out its 2002 lows...I mean, if this economy is bordering on being the worst in 50-75 years, wouldn't it make sense for the market to minimally negate its low made just six years ago?...And secondly, to even remotely suppose the bear market is over, I believe it is necessary to reach that monstrously loud, panic stricken moment where the public, and the so called "professionals", finally change their tune from, "Is this the bottom?" to "THERE IS NO BOTTOM!!!"...and then burn up the phones and the internet as they sell virtually every stock and mutual fund they own.
 
Anyway, here's a century long look at the Dow...From this perspective, I almost believe it makes taking out the 2002 low look like an inevitability...
 
 
 
 
Buy Treasury Bonds
I see them making new highs again...
 
Having been on the buy side of bonds for some time now, I find it amazing (yet understandable) that I have seemingly yet to see the first analyst recommend buying this market (except briefly after it completed its recent 30 point surge). Now, all I hear, once again, is "Rates have to go higher!" and "Sell the bubble in Treasury Bonds!", to which I strongly disagree. As noted in my last newsletter, we exited all of our long positions the week of December 16th in the 138 area, and with the March Bond now back at 129, I firmly believe this market is a buy once again...And I look for Treasuries to fairly quickly trade right back up and into new highs.
 
Yes, the bailout means the government is going to be selling a lot of long term paper (heavy supply), which is one of the "logical" reasons analysts are so sure bonds are a sale...but I am confident EVERYTHING the government wants to sell will be bought...at whatever the yield it carries. To begin with, the WORLDWIDE economic/real estate debacle is not going to disappear in a quarter or two and there a fear of owning equities will remain for years to come. Therefore, I think it is only logical all the "cash on the sidelines" (that brokerage analysts will tell you is anxiously waiting to jump back in to equities and rocket the stock market higher) eventually will end up invested in some form of fixed income, with much of it going to what I consider to be the safest, long term instrument on the planet...US Treasury Bonds. Aside for all that cash that has been piling up, more and more working people who STILL have to divert some percentage of every paycheck into a retirement account are going to be discovering the bond market. Too many of them have been burned by the stock market (twice, big-time, since 2000) to swallow the idea "you have to be in stocks", and with money markets basically paying zero percent, strange as it may seem, I believe there are hoards of people who will love the idea of earning 2 or 2 1/2 % on their money, with a US Government guarantee they can get it all back in 10 or 20 years time...
 
All those analysts who are bearish the bond market also raise the issue of, "What if China or other foreign US bond holders decide to dump all their bonds!!?". The first thing I'd say is I have heard that same absurd argument for YEARS, as bond prices have climbed higher and higher, and my answer is still the same. Every day, all over the globe, whether the money is coming from banks, foundations, insurance companies, pension plans, governments, etc., there are billions of dollars, again, EVERY day, that are earmarked specifically for fixed income somewhere on the planet, and with the USA still considered to be the world's last bastion in a financial crisis (evidenced by the 20% rally in the Dollar since July), you had better believe there are plenty of buyers for US Treasuries, especially considering the world's current quite shaky circumstances...With rates low everywhere (unless you want to consider something like Brazil at 12%), China, for example, is NOT going to suddenly dump their US Treasuries and shift them to maybe Japan with a 30 year bond at 1.93%, or Britain (truly the western world's #1 economic basket case today) at even 4.66%...Will they "trade" the market? Sure, everybody does, which is why we will maybe see some gigantic swings, but just take all their money home and blow the world economy, and themselves, to pieces? No way.
 
The bottom line is, I believe domestic and foreign fixed income buyers are still going to gobble up every dollar of however many billions of 10, 20 or 30 Year Treasury's the government wants to offer...and I would not be surprised to see Treasury Bond futures trade into the 150's, meaning the 30 Year Treasury yield would probably fall as low as 2%...
 
 
 
Still Short the Soybean Complex
 
I have been short either Corn or the Soybean complex for many months now...and intend to stay that way in Soybeans. I don't have much of a comment here beyond saying: Considering the current worldwide deflationary environment, I cannot even begin to imagine what is out there to actually rally this market from its present $10.00 back toward the teens (??), or for that matter, even $11.00. I then remind myself that JUST 2 1/4 YEARS AGO, in more "normal" times, spot soybeans were trading at $5.30 a bushel...If we are therefore, one more time, in the worst economic shape since the Great Depression, doesn't it only seem natural to be looking for Soybeans back down, at least, under $7.00 ? If so, we are talking about another $3.00 a bushel or $15,000 per futures contract...which is a trade I am VERY interested in making. In fact, where for the past few months I have probably been the most aggressive about short Cattle (and still am), my immediate primary focus is to now beef up our shorts in the soybean complex. 
 
For the past two to three weeks Soybeans have been inching higher and are now roughly $2.00 off their early December lows. My impression is this rally is primarily due to a lot of bullish talk about dry weather in Argentina combined with the overall general new year feeling (in error I think) that many commodities have fallen so far, they "must be a buy". For those of you who were reading my stuff last summer, you'll maybe remember we went short Corn dead into those floods which were supposedly wiping out the Midwest corn crop. Damage was done to the crop, but immediately thereafter, Corn began a collapse that saw it lose 50% of its value within the next four months...The point is, the weather in Argentina is NOT going to wipe out their crop, and aside from that, the wildly bullish commodity atmosphere of 2008 is a million miles in the past and the world is no longer jumping all over itself for ANY commodity...and I think there is a strong possibility Soybeans are now ready to head south again in a big, fast way...I don't expect to see them lose another 50% from here and be banging $5.00, but as I said before, something in the 6's wouldn't surprise me at all...In fact, though I may be dead wrong, my bet IS we'll see $6.50 or lower, and we will do so within the next 60-90 days...
 
 
 
 
Still Short Cattle
 
After bouncing around in the 80's for several months now, Cattle have finally retreated back to their lows, and are, I believe, now ready to bust through and drop another 10-15 cents. I know pretty much everybody in the cattle industry was caught off guard (which is the way it always is) by the sell off from record highs last summer, and they are now probably losing money on every animal they send to market. Meanwhile, all I read, over and over, is how "short" the cattle numbers are, i.e., that there aren't enough cattle to meet demand...and how cattle prices are therefore supposed to turn up big any day now...The problem is, that's the same story I've heard for months as the market has been dropping roughly 30 cents, and I can't help but think there are a lot of nerve racked cattle owners who have been hanging on the past few months, thinking the recent sideways action must be the long predicted bottom and hoping for higher prices to sell into...As a live animal is not something you can shove into storage if prices aren't what you want...they require "room, board and a vet"...so there seems to inevitably come a point in every bear market in cattle or hogs where you think it just can't get any worse, and then the bottom REALLY falls out as you get whole "herds" of cattlemen saying, "Sell 'em before they cost me another day's upkeep!". I do not know what is going to happen in this, or any market, but I do think cattle look like they are headed for new lows, and if this is the case, we could easily the see a lot of freaked out, get-me-out live animal liquidations that results in one of those classic stupidly straight down cattle moves I have seen (and suffered through) so many times before.
 
 
I have a few opinions in several other markets...but that's enough for one newsletter...
 
If any of this interests you, or if you have any ideas of your own you'd like to discuss, do give me a call...
 
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
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