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May 30, 2008
This piece is way too long and
feels somewhat disjointed, but since I haven't written
anything for months, I figured I might as well cover all the
bases. If you don't want to wade through all this hot air,
you can get the general, unfortunately gloomy idea, by just
scrolling down chart by chart.
There are so many geopolitical and economic cross
currents in the markets today that it seems like
absolute lunacy to try to predict anything...And one
thing my 28 years in this business have taught me is, even
under "normal" circumstances, no matter who you are, how
smart you are, how hard you work, how perfect your
reasoning, or how good your instincts are, NOBODY knows
what is going to happen...Sometimes you get it right
(and more than likely not even for the reasons you
thought important) and sometimes you just don't get it
at all. In those 28 years, on many occasions I have
experienced feeling like a futures market Einstein, and
just as many times, if not more, I have felt immensely
less intelligent than our nose-for-a-brain family
beagle.
So here are my two cent
opinions,
Some lengthy, some very
brief,
Some I'm putting money
on,
Some I am not.
In the end, however, it's every man's call for
himself. I may be a "pro" but I probably don't know
any more about what's going to happen than you
do...And one of the things these almost three
decades (yikes!) have taught me is to keep reminding
myself that "I don't know". To me, this stuff is
math, educated guesses and calculated risks...and
hopefully a little luck once in a while.
I believe long term interest
rates are headed sharply lower.
Buy Treasury Bonds
(They go up when interest rates go down)
The decline in real estate prices is far from
over and will probably get a LOT worse.
With the current state of the economy, the
idea the Fed is even
remotely close to raising rates is ludicrous.
I have NO idea as to how far the whole housing debacle will
extend but when I see developments full of brand new (year
old) totally finished houses with prices already whacked
10-15% and zero traffic looking at them, I can't help but
expect real estate prices can do anything but continue to
fall...There's one example right down the street from
me...$500,000 homes that were finished last summer, 13 of
them occupied and 28 still sitting there empty. It's late
spring, they've lowered prices by $30,000 to $50,000 a unit
and the place is still like a ghost town, not even an agent
on the premises. Maybe I'm wrong, but my guess is easily 25
of them will still be unsold come winter when the housing
market dies for the year...and those houses won't have a
chance to get moved until 2009 when they'll be probably be
priced deep in the 300's...
Not to mention that...
Most anybody who wants to buy/move can't...until they
sell their own decreasing-in-value home...which generally is
just not happening right now.
Most anybody who bought a house in 2006-2007 (and I don't
mean subprimers) may easily already be underwater...I don't
know the exact national average, but I'd bet most buying was
done with 5-10% down. With the nation wide decline in
housing prices, this could mean many "normal" buyers now
have a mortgage bigger than the value of their home.
Much of 2003-2006 boom here was financed by consumers
sucking money out of their homes with prime equity loans.
As/if the decline in housing values continues, many more
home owners will also owe more than their houses are worth.
At some point (soon), I would guess the commercial real
estate market should start to make nasty headlines, maybe
worse than we've seen as a result of the residential
market...All those new strip malls (on EVERY corner around
here), malls and office complexes you see everywhere were
built with the same "good times will never end" attitude
that got housing in trouble...And as people have less and
less to spend, many of those retail locations will have far
fewer buyers than they need to stay open...Believe me, there
is a mountain of CDO/mortgage paper (the stuff that made all
the headlines) out there in commercial real estate that is
NOT worth what Wall Street valued it to be.
None of the above will be inspiring people to go out and
spend money...
And then you've got the oil thing...a bone
crusher totally independent of the real estate disaster...
Oil is already killing the economy. Economic
data from here forward
will dispel ANY notion of an economic
recovery.
The energy situation that is murdering the average middle
class family and below...whether it be to run their
vehicles, to heat or cool their homes, or at the
supermarket...the American consumer/economy must be buckling
at the knees...Everywhere you turn, economic activity is
being curtailed by oil prices...whether it's at the consumer
or business level...I don't think the implications of the
damage oil is taking on the economy needs any elaboration at
all.
I am not an economist, and I may be so incredibly wrong,
but I just do not understand how anyone can suppose the
economy is bottoming out here...I know it will sooner or
later, but right now, between the housing/real
estate/energy crisis here at home and the ongoing wars
in Iraq and Afghanistan, we are in more trouble than I
can ever remember...and the last thing we need, or will
get, is rising interest rates...
Every bull move I've seen in bonds was
accompanied by one major theme
that argued (in error), all the way up,
"Don't buy bonds".
This time around, the reason you'll hear NOT to
buy bonds is "INFLATION!", as high
inflation can offset whatever interest you are receiving for
owning a bond...However, inflation has been all over the
news for almost a year, which should have crashed the bond
market, but bonds have, at their worst, only gone
sideways for the last six months (charts below)...That this
MAJOR factor has not even dented the bond market speaks
volumes for its underlying strength...Putting it another
way, if all the inflation we've experienced hasn't driven
bond prices down, what will?
Beyond that, I firmly believe the whole inflation/rising
commodity prices scenario is over. Oil is finished. The
Grain "shortage" is finished. The precious metals bubble is
finished...A year from now, most every commodity that is now
generating perpetually bullish headlines will be, as they
say, "on its ass", and the greatest concerns well may be
about Deflation, not Inflation...Some of the commodity
bullishness we've had is genuinely based in tight
supply-demand equations, but some very large degree of the
enormous price moves has come strictly from the speculative
sector...and the combination of a dramatically slowing
economy, overleveraged funds, increased production and
reduced demand (high prices seemingly always lead to this)
WILL mean lower commodity prices.
I may be dead wrong but I expect to see Treasury
Bond futures at least in the upper 120's before this year is
finished.
Short Corn-Short Agriculturals in General
There is no way you could have missed all the headlines
about Ethanol and the Corn market lately...And if you
remember, several months back the Wheat market was just all
over the news...as was Rice just a few weeks ago...the story
being the world was "running out" of those and other
commodities...Without going into a whole lot of "logic" as
to why I want to be short corn, I'll just start with charts
of what Wheat and Rice have done recently.
Need another example? Here's Sugar which was the first
"darling" of the biofuels bull market story several years
back.
I believe Corn will suffer the same fate as these three
former commodity bull markets...Aside from the fact you KNOW
it's being planted from fencepost to fencepost around the
world, all the commodity market press I see in corn
routinely points out it is following crude oil...Why then,
has Corn not moved up at all during the last two months
while Crude has rallied $35? Bottom line is I
believe this market is jam packed with speculators
who mistakenly think this market is bullet proof...and the
next move is going to be sharply lower, with $4.00 a bushel
($2.00 lower, $10,000 per futures contract) being a likely
target.
Just remember, they don't have to take years to develop new
mines or build new factories to ramp up production. That's
the primary reason you see all those big bull moves crash
just as abruptly as they went up...or even faster.
Sidelines in Cotton
After owning it for years, those trusting
souls that were still in cotton finally scored VERY
large percentage gains on the INCREDIBLE run up that
occurred from mid February into early March.
On the chart below, you can see a roughly 25 cent move
that took place in 15 trading days. The truth is, due to
the fact there are no daily trading limits in Cotton
options (as opposed to the 3 cent normal limit in
futures), the move up actually hit somewhere in the
$1.09 area, making the move more like 40 cents (one cent
move = $500 per futures contract) if you were in the
option markets.
This recent activity in cotton is a great example of the
oftentimes random and volatile nature of the futures
markets...I have yet to see an explanation for what has
taken place in cotton during the past few months, nor do
I expect to. We were lucky enough to unload
all of our long held option positions dead into the last
two up days of the move, then watched the market drop
straight back down the full 40 cents during the next
three weeks. We took a stab at it once
after it had dropped roughly 30 cents (and kept falling)
but other than a few small stabs at buying again, I
have pretty much been preferred the sidelines since the
May options ceased trading on April 11th. Simply stated,
it just reaffirms my conviction that no matter how
strong, how logical, how seemingly perfect your opinion,
there is no way to know what the markets are going to
do. You can make some decent guesses, but that is all
they are...whether you trade charts, or fundamentals or
sentiment or the stars...
With my dismal view of the economic situation, I am
disinclined to be a buyer of any raw commodity markets
right now, cotton included...I will say cotton is
certainly seeing major acreage reductions again this
year, and in the perverse way cotton went no where for
years while everything was booming, it would almost seem
fitting to see this market start up in the midst of a
lousy economy (it's happened before)...At any rate,
after having "lived" with this market for years, I'm
presently content to accept our gains from the March
rally and look elsewhere for opportunities.
Crude Oil is heading South
I don't see how Crude can do anything but go down from
here. At current levels, it very much reminds me of one
of my first dumb luck, but common sense, predictions
when I entered this business in late 1980. Bonds were
trading in the 50's and the Prime Rate was at 20% with
the world screaming, "Prime is headed for 30%!". My
simplistic conclusion was this could not possibly be
true as the capitalistic system would cease to function,
and collapse upon itself, if rates stayed at 20+%, much
less 30%, for any length of time at all. With Crude at
$130-$135 a barrel, I think you now have the same
thing...Either it backs off due to "natural" market
forces or these prices have reached the point where,
together with the credit and real estate busts, the US
and world economies are about to truly go over steep
cliffs...and demand for energy with it...in which case
crude prices come down anyway.
Between July, 2006 and January, 2007, spot Crude Oil
dropped from $78 to $50 a barrel in what was then only a
38% correction. As 30-40% rapid breaks in ALL of the
commodity bull markets have become the corrective norm
during the past two to three years, it would
not surprise me in the least to see Crude back at $70 to
$80...and a hell of a lot faster than anybody would ever
expect...like in two or three months time...I
believe Crude has reached the "Gaga" stage...where
people are dumbfounded by the up move and just sitting
there watching it happen with the idea it will
be stopping anywhere soon just totally out of the
collective, mass opinion picture.
Bottom line...I think Crude has to go down from here, or
the world economy is going to take it down with it, one
way or the other.
A Stronger Dollar
I started buying the Dollar Index again in December when
it was trading in the 76.00 area and have watched it
fall as low at 71.00 a month or so ago...Back in
December, we started with units of March 77 calls and
March 76 puts and most recently have repositioned in
June 73 calls and June 72 puts. I still think it is a
major buy with tremendous leverage and am now taking new
positions in the September contract. If you want my
useless reasons for owning the Dollar, they are the same
as they were in December and here is a link to that
newsletter -
http://www.crokerrhyne.com/newsletters/12-5-07.htm.
The dollar index is a composite measured against 6 other
currencies...the Euro, Swiss Franc, British Pound,
Swedish Krona, Japanese Yen and Canadian Dollar...If you
think their economies are in perfect shape, think again.
If you think their economies are not tied to ours, think
again. If you think there is not something special about
our unique geographic location on this planet (not
jammed shoulder to shoulder with our major ideological
enemies), or that there is more of a desire to be here,
visit here, immigrate here or own here than any other
country there is, think again. Maybe all of this is
meaningless, but I just don't buy the idea the Dollar
and USA can only be going to hell without taking the
world with it. Everybody wants a piece of what we have
here, and with the dollar where it is,
everything American is on sale internationally and money
is headed this way. This should mean, to me anyway, a
higher dollar...
Where it will be a year or two or five in the future, I
don't know...But right now, my instincts tell me (and
have incorrectly told me for a while) this is a market
to own, mainly because everybody seems so sure it can
not possibly be going up...Maybe I'm wrong,
but to see it rally 7-10 points ($7,000-$10,000 per
futures contract) from current levels just wouldn't seem
like that big a deal.
I do have to say my one major worry with this position
is the Dollar and Bond markets have historically tended
to move opposite each other. This is by no means an
absolute relationship, but buying them both may mean
being dead right on one, dead wrong on the other.
Precious Metals
Can you say "BUBBLE"? That has become the expression du
jour for describing any market that goes to the moon
with, in the end, a gaggle of folks all over it and this
is how I see the gold at $1000 an ounce...I know there
at least a few of you (especially one savvy Louisianan)
who will swear I still just don't get it, but to
me, Gold is just another commodity that goes through
normal perceived value fluctuations, whether you want
to look at it from a daily, monthly, yearly or even
decade long perspective...that it is just another
commodity subject to mass hysterias and periods of
popularity but most likely will be semi-permanently
returning to much lower levels...I don't buy the idea
we've entered some period of unpreventable
hyper-inflation, or that we will ever revert to anything
resembling a gold standard based currency system, or
that the world economic system is going to fall
apart....and the bull market in gold, which has seen a
400% ride, has probably ended.
Short Cattle Markets
With the average consumer probably in the worst shape in
decades, I cannot imagine how the cattle market can
remain perched here at its present all time highs...I
know (and the market knows) cattle numbers are down due
to last year's drought in the Southeast but I still
suspect the general public is just not going to be
hitting the steak houses nor the supermarket beef
counter with the same dollars as was the case in years
past...And the current almost euphoric prices for cattle
on the hoof will be tumbling in a big way.
The Stock Market
In my lifetime, we have been through a number of
economic crises, but never anything like we're
experiencing now...where you have all these major
problems (housing, energy, wars), in some ways related
to each other but really all quite independent
situations...and it's just hard to be my usual
optimistic self and envision everything working its way
back to "rosyness". So when I look at the stock market,
which I hate to ever even begin to guess as to
direction, and I just can't see it anywhere but VERY
much lower than it is now. Both the oil and housing
situations have been eating at people for a year now,
but the Dow, for one, is still about where it was last
spring. I suppose this might have something to do with
the dollar having increased exports, or robust military
spending to support Iraq and Afghanistan...or just Wall
Street AIR...At any rate, not necessarily
because of any particular news or event, I can imagine
it beginning a descent that takes the DOW, for starters,
easily back under 10,000...Talking to
brokers and investors concerning stocks, I get the
impression everybody is just sitting on what they own,
neither buying or selling, and have been that way for
some time now. This leads me to conclude they probably
SHOULD BE doing one or the other in a significant
way...and their next big move, forced by the market, may
be selling in a major way, as the market is tumbling
sharply lower...Admittedly, I may be just dead ass
backwards, that I'm saying sell this thing when all the
bad news is really a contrarian's signal to be a big
buyer, but I have to go with my perception things are
still going to get a lot worse than they already are.
That's all folks...If you've read this far, I'll say
thanks for the time. Hopefully some of this is right,
but if so, like I said in the beginning, it's probably
for the wrong reasons.
If you like any of these ideas, or just want to tell me
what an idiot you think I am, feel free to call.
Regards,
Bill Rhyne
866-578-1001
770-425-7241
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