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Sept. 8, 2006
Interest Rates
Both short and long term interest rates have been
quietly falling as reflected in the bullish upswings on the
Eurodollar and Treasury Bond charts shown below (they move inversely
to interest rates and rise when rates are falling). While
the Fed has repeatedly stated (as they always do) they will remain
vigilant on inflation, the minutes from their most recent meeting
reflect their opinion, over and over, that 17 straight 1/4 point
tightenings are now having the intended effect of beating down
inflation...which should be a major positive for the
Bond market.
Excerpts from the minutes of that August 8th Fed
meeting:
"...most participants thought that, with energy prices possibly
leveling out, aggregate demand moderating, and long-term inflation
expectations contained, core PCE inflation likely would decline
gradually from its recent elevated level..."
"...inflation expectations appeared to have remained contained
despite adverse news about prices. In light of these factors, most
participants expressed the view that core inflation was likely to
decline gradually over the next several quarters..."
"...most members anticipated that inflation pressures quite possibly
would ease gradually over coming quarters..."
"Core consumer price inflation was projected to drop back somewhat
later this year and next, mainly as the effects of higher energy and
import prices abated."
"The full effect of previous increases in interest rates on
activity and prices probably had not yet been felt (my
bolding), and a pause was viewed as appropriate to limit the risks
of tightening too much."
The bottom line is the price of money (interest
rates) is undoubtedly an extremely significant factor in any
economic equation and what the Fed has done for the past few years
will have its desired effects...For this and
many other reasons (one being nobody really wants to sell quality
long term US government paper), I continue to think the
Bond market is going a lot higher and am still a buyer.
This first chart is of implied volatility in bond
options. Implied volatility has been falling steadily as the market
has moved up, which indicates (to me anyway) nobody believes what is
happening, or for that matter, that anything big is coming...
The Eurodollars (not the Eurocurrency and nothing
to do with Europe) are basically the benchmark for short term
interest rates (90 day money). Since July 1st, while everyone has
been wondering whether or not the Fed was "done", Eurodollar futures
have been indicating they are and have already taken a full half
percent off of what short rates were anticipated to be six months
from now. I am still long this market and am still a
buyer.
Energy
More and more, the Crude Oil market appears to be
rolling over...As I have pointed out previously, in today's
marketplace, jammed full with billions of hedge fund dollars that
have entered the futures arena during the past few years, it seems
that every time a popular futures bull market ends, it does so by
dropping 20%-30% (or more) in virtually no time at all. I don't
think Crude is any different, and if it is breaking down, I see no
reason why the "$60 floor" it supposedly has can't be seriously
violated. One thing I KNOW about this
business is that however good the story, however perfectly bullish
the fundamentals, any market can, at any time, just totally blow
that story to pieces...I don't know what is going to happen in the
oil market, but I do know the story there is now an old one, that
everybody in the oil business was certainly loaded up with product
for another monster hurricane season that has not occurred (I know
it's not over) and we may have reached one of those lulls in the
market where there is immediately a hell of a lot more supply than
there is demand to soak it up...Whatever the long term fundamentals,
this can be the recipe for a classic futures bloodletting, which is,
I believe a distinct possibility in the Crude market...I'm
looking for the low 60's, but would not be surprised if Crude fell
to the mid 50's....This may sound nuts but these
are the futures markets...And if I am only
moderately right here, with Oil's impact on inflation, the bond
market should just love it.
Meats
Both the Lean Hog and Feeder Cattle contracts
still look very much like classic bull markets. I won't even try to
tell you what is making them go up, just that I love the charts and
note that, per the CFTC's most recent Commitments of Traders
reports, small speculators are still net short (2 to 1) Cattle and
Hogs...As I was so harshly reminded last year in Copper, top picking
is about the toughest trade there is in futures...and when I see a
hoard of small traders essentially trying to do the same in the
meats as they are moving into new highs, I am very comfortable being
a buyer. As I have noted before, as the meats sometimes have a
tendency to make mind-boggling non-stop moves, I believe they offer
some of the best option leverage you ever find in the futures
markets. Into pullbacks, I am still very much a buyer in
both of these markets.
Cotton
Cotton is still wearing me out but I continue to
see this as a market that will, at some
point, just lift off and go...in a very big way. This has nothing to
do with ego or not being willing to give up on a market I have
recommended (and lost a lot of money in) for seemingly forever
now...It's just that every time I look at Cotton, which hasn't gone
down, just sideways for over two years at very low historical
levels, I see major upside potential. I've said it before
(many times) but this is a market that traditionally does make some
very large moves...and the fact it has not done so for so, so long
just tells me the opportunity has gotten better.
Though the USDA seems not to have accounted for
it (yet), our current crop has been rated the worst in years. Take
this together with world demand setting records every year, as well
as US exports doing the same (China's imports in 2006-2007 are
expected to be virtually the equivalent of our entire US cotton
crop), and I can't help but tell you I still believe this is a
market you want to own.
One last small note....Without going into detail,
due to the way the government loan program is set up in
cotton, during the last month, a tremendous amount of cotton from
last fall's harvest has finally left the farmer's hands and is now
owned by the merchants who market our crop to the world.
While this doesn't mean cotton is going straight up from here, if it
were to do so, it wouldn't be the first time an agricultural market
took off as soon as the farming community let a crop go (after
sitting on it forever)...
I am now buying the March, May or July
2007 contracts, primarily owning out of the money calls, as I
think...and I may be dead wrong...it is impossible for cotton to be
laying here in the 50's six months from now.
Give me a call if you are interested in any of the ideas here...or
have any of your own.
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
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