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November 14, 2009
This is
probably the dumbest newsletter I have ever written, not
so much for the content, but for the absurdity of its
length. I really started with the idea of presenting a
brief semi-cumulative overview of the markets before
getting into some specific trade ideas, but before I
knew it, this piece had evolved into something
massively, ridiculously longer...Bill Rhyne taking
himself too seriously...and the result is a product I
suspect very view of you will even try to read...Skim it
maybe...but actually read it? No way...I, myself, HATE
long newsletters and really do try to keep this
one fairly straight to the point, but by the time I
realized what was happening here, I was in too deep to
turn back (dump it all in other words), so ahead I
went...I suppose the reason behind this "epic" is I DO
believe we have reached major turning points in a number
of markets...Undoubtedly, some of what I've written here
is right, and some of it is dead, dead wrong, but
hopefully there are some ideas here that help you make a
little money in the markets...
Give me a call if you do
want to look at any of these ideas...or talk about any
of your own,
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
November 14, 2009
Since returning to the USA in late June I've actually
written four newsletters dealing with something other
than the soybean complex but all of them only reached
the 80% finished stage and never went out...After giving
my 10th grade son a speech last night about "there are
times in life when you just get the job done, no matter
what it takes", I have decided to take my own advice and
write this damn thing, to its conclusion, and send it
out today, no matter what it takes...so here goes.
What the "experts" think...
Let's start with a few opinions that I perceive to be
fairly unanimous (and I believe wrong) among the
analytical/economists/media community...While there are
certainly times it pays to go with the prevailing media
winds, in general, all markets do reach
a point when seemingly 100% of the "logic" as expressed
by the supposed experts points exclusively in one
direction, in which case just about everybody who could
possibly want to jump on an idea is therefore already on
it...and...as we have all seen time and time and time
again, it is therefore then best to get yourself on the
other side of the fence...Just as 99.5% of the world's
talking heads and Wall Street analysts did NOT predict
the Dow crash, or the housing & mortgage debacle, or the
$110 bear market in Crude Oil...OR the ensuing 3700
point, last six month's rally in the Dow, or the 150%
$50 re-rally in Crude, I can promise you it has always
been that way and always will be...There are a million
guys in suits out there who make their living by
spouting opinions (myself included), and I can assure
you, only about 1/2% of them know anything more about
where the markets are headed than you do...And when
those occasions occur in which you hear, ad nauseum,
totally one sided "logic" being expressed by those well
dressed talking sheep masses, more often than not, it IS
time to go the other way.
So, what do the "experts" think...? And just
to be clear, I absolutely disagree with all four of
these opinions, and am, in fact now taking positions
directly opposite them...
1. The number one universally held opinion
out there is: "The Dollar is going down!"...Unless
you've just returned from Mars, you have certainly seen
and heard this everywhere with all sorts of "logical"
analysis as to why the dollar can ONLY be headed
south...
2. Due to the "falling Dollar", together with all the
money the government is pumping into the system, as well
as the never-ending Chinese and Indian appetites,
commodity prices can ONLY be headed
higher...and inflation, or even hyperinflation,
is therefore is just around the corner.
3. Gold, the "inflation hedge" which has
quadrupled in the last seven years, is still a buy and
can still double or triple from here...and
EVERYBODY should own some gold to protect against
inflation as well as the highly laughable opinion (to
me) that the world financial and currency system could
disintegrate.
4. Due to the coming inflation, and all the debt being
issued/incurred by the United States' deficit spending,
as well as the supposition that the falling dollar could
also mean foreigners will no longer want our Bonds,
interest rates can then ONLY be preparing to
"SPIKE" higher... and Bond prices can ONLY be headed
lower.
To be sure, there are some other quite clear, also
almost universally held opinions out there, but from
what I've seen, none of the four I've listed here is at
all in dispute, and interestingly, they are all linked
together by the "certainty" of a decline in the dollar.
And as I said above, and not simply because I am some
ever-opposite-the-crowd contrarian, I AM
taking positions against all of those opinions...Hopefully
without getting too longwinded, I'll try to explain
why...
Buy the U.S. Dollar Index
I think this seemingly unanimous rhetoric
about the US Dollar having entered some bottomless
decline relative to the rest of the world's major
currencies is hogwash...All you have to do
is look at how the United States Dollar and US Treasury
Bonds went virtually straight up last year when
everybody thought the international financial system was
about to collapse...
In other words, when the chips were down, if you were
looking for monetary safety, the United States and US
Treasury instruments were what everybody wanted...They
weren't jumping all over Euro's or Pounds or the Chinese
Renminbi, or looking for Brazilian Bonds...They wanted
US Dollars and Dollar denominated fixed income
instruments...And I don't think it is even remotely
possible that same DECADES-in-the-making mentality has
simply disappeared in the last six months...The
USA is STILL the safest, number one, and most highly
desired business location on the planet, the United
States is STILL the locomotive for the world's economies
and the US Dollar is NOT about to be displaced as the
world's #1 reserve currency. The Dollar is
just like every other market we trade...Sometimes it's
going down...And sometimes it's going up...And come on,
how many times do have do see ALL those jerk-offs
(sorry) on TV, ALL regurgitating virtually
identical "our research indicates" foregone conclusions
that such and such a market is going to do so and so,
to KNOW you should be looking at the other side
of whatever idea they are ALL espousing?
The truth is, however, just about any economically
fundamental reasons anyone might have for buying or
selling the dollar are probably irrelevant...Why?...Check
out the following quotes from Alan Greenspan,
the guy who for almost two decades, as Chairman of the
Fed, was at the top of the economic information chain.
In other words, he had more advisors, more computers,
more data...more everything...than anyone could ever
wish for when it came to predicting the economic future
of the planet...Even so, this is what he had
to say on two different occasions when answering
questions as to the direction of the US Dollar:
"There may be more forecasting of exchange
rates (currencies), with less success, than almost any
other economic variable"...Alan Greenspan, July 16,
2002.
"Statistics have shown that forecasting
exchange rates (currencies) has a success rate no
better than forecasting the outcome of a coin
toss"...Alan Greenspan, Nov. 19, 2004.
I have presented both of those quotes in earlier
newsletters but I keep them in my files to remind me
NOBODY knows where the currencies are headed...And more
importantly, as we have now reached one of
those points in time when EVERYBODY is running around
mouthing the same so perfect and supposedly so
independent bearish US Dollar analysis, it IS time to be
looking for the opposite...Not only based
on what Mr. Greenspan had to say, but also from my 11
years at Merrill Lynch where our Atlanta office would
occasionally be blessed with visits by teams of
international currency bluebloods, all of whom were
presented as "knowing" what the Dollar was going to
do, and NEVER ever were anything but dead wrong,
my very firm opinion is right now the last thing you
want to be betting on is this so popular idea that the
US Dollar is a market to be short.
I expect to see the US Dollar Index
appreciate something like 30-40% in value during the
next 6-9 months. I am therefore immediately recommending
long positions in the March or June 2010 contracts, with
a minimal objective of 15-20 points ($15,000-$20,000)
per contract.
BEFORE GETTING INTO SPECIFIC TRADE
POSSIBILITIES...A NOTE REGARDING ALL RECOMMENDATIONS IN
THIS NEWSLETTER...
As always, there are any number of
approaches you can use to establish a position,
including our usual recommendation of "units" composed
of two calls to every put (or vice versa in bearish
trades), but for simplicity's sake in this monster
newsletter, I have only listed the price of options in
the direction I think a market will be moving....
If you think Buying the Dollar does make sense, here are
a few ways you might go about doing it...
Short the Eurocurrency
This is essentially the same thing as buying the US
Dollar Index, which is actually a "basket" of six
currencies (British Pound, Canadian Dollar, Euro,
Japanese Yen, Swedish Kroner, Swiss Franc) but in this
case you are taking a position that only involves the
direct relationship between the the US Dollar (not the
index) and the European Eurocurrency.
This is easily a useless point to make, but while in
Europe earlier this year, with the Eurocurrency actually
15% lower than it is now, my feeling was, for anyone,
from anywhere, holding U.S. Dollars (not just American
tourists like myself), prices in the Eurocurrency had
simply reached the "stupid" stage. Travel has always
been one of my great passions, which has resulted in my
having spent approximately six years abroad in
approximately 50 countries during my 60 year lifetime,
so I'd offer that I'm not some whiny, first-time-abroad
American complaining that "everything is too
expensive!". I mean, day after day, when I found
myself faced with situations like paying the equivalent
of $50 for four breakfast rolls and four beverages in a
little coffee shop (we didn't, we made our own in the
RV), all I could think was, as I said, "stupid" or
"monstrously overvalued!". Yes, this is a totally
unscientific observation, but in the end, values are
really a function of perception, and my own perception
is there is NO way the Euro can stay at its current
levels. It IS absurdly overvalued and out of whack with
international reality...Admittedly, taking the cost of a
breakfast and including it in an economic analysis of
currency values is itself quite absurd, but I do know
the cost of that breakfast can be directly correlated to
the cost of anything European, whether it involves
tourism, exports, basic standards of living across the
continent, or whatever...and in my simple
mind, the Euro has no place to go from here but down.
I am recommending short positions in the
Eurocurrency using the March and June 2010 contracts,
with a minimal expectation the Euro will drop 25-30
points ($31,250-$37,500---this is a big contract) per
contract from current levels.
Here are the March and June contracts I would recommend
using to position on the short side...Again, I may be
dead wrong but I am looking for at least a 25 to 30
point move on the downside...
Short the Gold Market
Whether in the form of pundits with their unanimously
bullish "long term" price predictions, or in those
endless, sleazy radio and TV ads (on the network evening
news at that) hawking gold to the masses as "an
inflation hedge", or as protection against a collapse in
the US dollar, or for that matter the failure of the
international fiat currency system itself,
thus resulting in gold becoming the "new money", or in
the latest news that, "Oh my God, India just bought 200
tons!", THE BULL MARKET IN GOLD IS ALL OVER
THE MEDIA...to the extent that I would then state: If
this does not resemble a BUBBLE, I don't know what does.
After the fact, Stocks were a
bubble, Real Estate was a bubble, Oil was a bubble...but
none of them were considered as such when they were
banging new highs. They were only identified as bubbles
after we had witnessed their massive collapses...which
is, I believe, exactly what we are now facing in
Gold...Sure there are people who think it could "pull
back", or "correct", but the overwhelming majority of
opinion is, as you must be aware, "no where to go but
up!" (just like there is no where for the dollar to go
but down).
My own two cent opinion is this IS the latest
bubble and I would not be the least bit surprised to see
Gold trading at half its current value within the next
year...or even by late spring or early summer.
I think the current "story" in Gold is just another
ROUTINE example of how all of the financial markets are
really nothing more than a big mob psychology game in
which the masses are periodically separated from their
money...Believe me, rising prices in gold have nothing
to do with the classic supply-demand equation in which
production is being overwhelmed by ongoing industrially
related demand...Gold goes up primarily due to more and
more (and MORE) investors buying into the idea that they
"need" to have some money in this "asset class" to
protect against....etc., etc., etc...Gold, then, has
been rising on "investment" demand, with that word
"investment" being the key here...Sure, there are
people actually buying the real metal, but when you
consider the majority of investors, through gold stocks,
or more likely, Gold ETF's, are really just investing in
an idea, NOT the real thing, it should drive home the
fact that this "investment" is nothing but one more
piece of paper, with a big story to support it, and
therefore is inherently subject to the investing world's
laws of gravity; And however convincing the logic may be
today, the perceived value of Gold, or any market,
can fall (more precisely, evaporate) much, much
faster than the public wide realization that they have
all bought into another oh-so-sensible idea, and have,
one more time, lost their shirts...Maybe I'm just a
jaded, old school commodity broker, but
during my 29 years of living with the insanity of the
futures markets, I have seen this happen TOO MANY times
in TOO MANY markets to not understand it will happen
again and again and again...Something is "worth" 10
today, but then 5 tomorrow, or even 3...and THEN
everybody wakes up to fact there WAS another side to the
"story".
For gold to keep climbing, I think you have
to assume that inflation is soon to come roaring
back...And I do not. For one, to have
systemic inflation (which is quite different from the
fact that most consumer prices normally do tend to creep
higher over long periods of time) you have got to have
wage inflation...that is, you have to have a situation
where employees everywhere are demanding more pay
as they are unable to keep up with a rising cost of
living; And in today's environment, we all know the last
thing anybody in the work force is demanding is more
money. Right now, people are just trying to hold on to
their jobs. Right now, a lot of people are even taking
new jobs at lower wages, meaning consumers have less and
less money to spend. Hence, even at the most
basic consumer levels, fast food for example, prices are
actually falling...This is NOT going to abruptly change
overnight. This is not the recipe for systemic
inflation...and in reality, the Feds are rightfully much
more concerned about deflation than inflation.
As for true commodity price inflation,
besides my argument the whole dollar falling-bullish
commodity scenario is about to be disintegrated by
a dollar rally, I would also point out that
the tremendously overworked "China and India are buying
everything!" commodity story has its holes as well...Without
great detail, I'll just say that one of the "almost
universally held opinions" I mentioned earlier would
include the current popularity of investing in "emerging
markets" (also tied directly to the "falling dollar"
story) which do not take into account that anytime you
invest in an equity (i.e. pieces
of paper) market that has just doubled in the last 9-12
months (Shanghai +97%, Bombay +108%, Brazil +112%, just
to name the big three in this category), you are kind of
asking for it. Sure they may keep going, but if you do
even begin to make this sort of investing a habit, I'd
offer you are bound to fail...But the real point here
is, those markets can take a big hit, and so can
their economies. I don't mean these countries are about
to crumble and burn, but I would suppose they are just
as susceptible to market sell offs AND economic
contractions as every other country in the world today,
or for that matter, in all of history...My sense is,
because China is so big, there is almost a perception
among analysts that they can ONLY keep growing, just
because they want to, and therefore, there is then the
blind assumption their appetite for commodities will
continue to do the same...which, again, I think easily
may be in error...Do I know this is going to happen?
Hell, no, but I do know they are just as subject to the
realities of economics as everybody else, and expansion
and contraction, whatever a government desires, are
distinct aspects of that reality...And, hey, let's not
forget that these massive populations do not come
without their disadvantages...China and India are not
economic utopias...Yes, they may have millions of new
consumers rising up, but they also have hundreds of
millions who do not have the extra bucks to buy
their first cell phone...They are just trying to scratch
up their next meal.
For gold to keep climbing, I think you also
have to assume the system is going to fall apart...And I
do not. Aside from my belief the system falling apart
would mean EVERYTHING, gold included, would crash in
value, I really don't think the world's diplomatic,
economic and financial systems have reached "the end of
time" nor anything approaching it...I don't
mean everything is peachy on the planet but I do think
we have returned to a state of affairs in which we are
no longer dealing with the massive financial surprises
that crippled the system during the last year or so.
Yes, there are worries to be dealt with, but when has
this not been true? Whether it's the deficit, or social
security going bankrupt, or terrorism, or wars, or oil
prices, or the Middle East, or inflation, or deflation,
or rising rates, or stock market bubbles & crashes, or
the Savings and Loan buyouts, or Enron, or Long Term
Capital Management, or the Southeast Asia Crisis, or
immigration, or bitter elections, or 9/11, or a North
Korean maniac, Katrina or WHATEVER---In a normal
economic world, there are ALWAYS critical events and
situations which need addressing by the powers that be,
and all of these crises are replete with multitudes of
talking heads wringing their hands in despair while
complaining that "what the government is doing just
isn't working!", but somehow, the abyss has
always been averted and we have all gone on happily with
our lives, careers and retirements...Yes, the last few
years have been devastating and the damage done has been
on a scale unseen in decades, but aside from the fact
that virtually every government in the developed world
is doing everything it can to reboot the system (which
WILL result in a positive, forward moving outcome),
I also firmly believe there is a global
economic inertia in force which was spawned by the
confluence of the Information Age (basically computers),
Globalization, and the 1989, century-in-the-making,
victory of Capitalism over Communism...Today, the world
is all about business and economic development, not
political ideologies, and although we have recently been
through a major bump in the road, what we've really done
is wrench out a number of excesses, and from somewhere
soon, my guess is we'll be screeching back towards
relatively full throttle...Though spending
habits may have changed some, the consumer oriented
personality/nature of the developed
world's population will still be what it was two years
ago...and I suspect we will quickly be back on the same
tracks we were on before. Maybe there will be some
degree of subdued financial behavior for a while,
but I'd suppose it will not be long before those masses
will be back to buying consumer goods and services very
much like they used to...which is
what keeps everything going...and several years from
now, just like the recessions of 1973-74, 1980-81,
1990-91 and 2001-02, all the sad stories will just be
memories...of very real and very difficult times, for
sure, but NOT a collapse of the system as we know it.
The bottom line is, while there is still bad
news galore, I absolutely believe we have turned the
psychological economic corner (quite important), and
while I don't expect world or US GDP to suddenly be
zooming along at 5% annual growth, I do think the global
capitalistic system is still very much intact, inflation
is NOT a problem, and the world is, as I said before,
very much back to normal...And in this environment, I do
not think Gold is therefore worth $1100 an ounce, or
anything approaching it, and I firmly believe the next
big move in Gold in going to be down. None
of us are going to be hauling around gold bars to pay
for groceries and nobody is going to be getting
rich just by listening to some huckster on TV telling
you how you can "triple your money!"...And believe me,
just because a few guys at the Reserve Bank of India
decided that now (?) was a good time to buy 200 tons of
gold does NOT mean it is going up. Just as Ben Bernanke
will tell you the Fed can only make guesses as to the
future, so is it also with the Reserve Bank of India...I
can assure you, and history has shown it, Governments
and Central Banks, can buy the top of any market
just as badly as might any individual in the world...And
after all, whoever made this decision in India HAS done
their buying NOW...and NOT three years or $500 ago.
I am taking short positions in the April and
June 2010 Gold contracts and would not be at all
surprised to see at least a $300-$400 drop ($30,000 to
$40,000 a contract) in price before June goes off the
board... Think about it...If just 6 or 7
years ago Gold was "valued" at $300 an ounce, and if
international economic confidence and stability are now
inching back on track, would it really be that big a
surprise to see gold "revalued" back to $600-$700 an
ounce...or lower?
Long Term Interest Rates are
Heading Lower,
NOT HIGHER
Buy U.S. Treasury Bonds
Those of you who have read my claptrap for any length of
time will know I could probably write 40 pages as to
what I see in the Bond market...This is where I have
easily had my greatest trading successes (and some major
disasters) throughout my dastardly career, and also
where years ago I came to the conclusion that Treasury
Bond Futures should be classified as THE
CONTRARY OPINION MARKET; that is, as the single area of
the markets where the trading masses, and specifically
those "experts" I so frequently deride, are
generally forever backwards in their opinions as to what
is going to happen...Furthermore, I believe the rate
markets are generally dominated by individuals who have,
let's say, just for the general sake of this argument,
the habits, mentalities and personalities of (with all
due respect) just about any banker you know. In other
words, the majority of the people trading and opining on
interest rates have spent their careers coming up
through VERY conservative ranks, and have very
definitely not risen through those ranks by being
risk takers...or boat shakers...And my more specific
impression, easily in error, is that the biggest
"opinion sheep" in all the markets are therefore to be
found in the interest rate sector...Putting it in other
terms, the majority of these extremely conservative,
risk averse (career and marketwise) participants in this
area of the markets don't think anything, really, unless
they can hear the same thing from ten, or fifty, or a
hundred other likeminded people in their industry...They
only buy or sell when they know everyone else is doing
the same...which often results in globs of them all
piling in together, the wrong way, at major bond market
tops or bottoms...and thus truly become, over and over,
like "sheep sent to slaughter"...This is obviously a
tremendous oversimplification and generalization of what
is a colossally sized market, but I firmly believe
this to be an important aspect of the interest rate
markets...And right now, if you follow
interest rate commentary at all, you are certainly aware
that virtually no one amongst the sheep is calling for
Bonds to go up...Quite the contrary, seemingly 99% of
the analysis I see is of the opinion that a "spike up"
in interest rates is dead ahead, and Treasury Bonds,
therefore, are only to be shorted...I ABSOLUTELY
disagree and I am a buyer in the
March and June 2010 Treasury Bond contracts, expecting
to see at least a 1% to 1 1/2% decline in 30 Year
Treasury yields (currently about 4.4%) within the next
6-9 months and at least a commiserate 15 to 20 point
rally ($15,000-$20,000 per contract) in the Treasury
Bond futures market.
Here are a few of the "reasons" you'll probably have
seen as to why rates are going higher (and again, I
think they are in error):
1. The government is issuing too much supply to finance
deficit spending, selling billions of dollars in US debt
instruments, which can only drive bond prices lower (to
attract buyers) and interest rates higher.
2. With the dollar falling, there is the risk that
foreign buyers, like the Chinese for example, will not
want to buy our bonds, and may even start selling what
they already own, also dropping the price of bonds and
forcing interest rates higher.
3. All the money the government is dumping into the
system for all the bailout programs will eventually
result in massive inflation as there will just be too
much money chasing too few goods.
4. Everybody "knows" that when the economy picks up,
interest rates have to go up.
There are other reasons being presented out
there, but these are the big ones...and to be clear, I
totally disagree with all of these assumptions...
The first thing I'd say is THERE ARE NO REAL
SELLERS IN TREASURY BONDS. Yes, governments
issue (sell) bonds but in the investing world, nobody is
really a seller. Analysts can talk all they want about
shorting bonds, but the truth is, anybody seeking
security who already owns US Treasuries, the safest
piece of paper on the planet, is holding on to it. If
you own, for example, a 30 Year Treasury that you
purchased 10 years ago, that is yielding 6.0 %,
guaranteed by the US government, and this bond will be
paying you that 6.0% for another 20 years, are you going
to sell it? And do what with it? Put it in a money
market paying nothing? Or risk it in stocks?...I doubt
it...
Conversely, I think the worldwide
demographics of the aging baby boomers have become more
and more of a factor on the DEMAND side of the bond
market...During the 1980's and 1990's, baby
boomer consumption was a major driving force in the
economy, and beyond that, with the advent of the world's
first government "mandated" retirement accounts in 1980,
and the fact those same consumers were also very much
encouraged by the government to stick part of their
every paycheck in some piece of paper (again, the
first time in history), these two decades saw a massive
influx of money into equities, and the parallel result
was the biggest non-stop bull move in stocks the world
has ever seen...But, with two blood on the tracks
"crashes" since 2000, I think it is safe to assume these
now-beginning-to-retire boomers are thinking more about
the old one liner concerning their return "of"
investment, as opposed to their return "on"
investment...Sure, the Gen X'ers and others will
probably continue to plug long term money into stocks,
but my guess is the vast majority of the "old guys", who
now have most of the money, will be much more inclined
to want the safety of fixed income as opposed to the
risks they know are present in equities...as will, I'd
say, maybe even a lot of not so old Americans who
just don't trust the stock market anymore...No, I don't
think the world is abandoning equities, but I
do think the odds favor a robust, international, and
fairly unceasing, demand for high quality fixed income
for some years to come, which will soak up HOWEVER many
billions of dollars of debt the United States wants to
issue...And just as the stock market kept defying the
pros by travelling higher and higher, during the 1990's
in particular, we'll see something of the same in the
bond market...And bond prices will keep going higher,
and long term yields lower, for some years to come.
Concerning a loss of demand for our Treasuries
outside the United States, it is also quite
important to understand that globally, every day, there
are literally billions of dollars that HAVE to be
invested in some form of fixed income (bonds and other
debt instruments that pay interest to the buyer)
somewhere on the planet. This buying comes from all
sorts of institutions, including governments, insurance
companies, banks, brokerage houses, pension funds, etc.,
and their buying is not a function of deciding, "Let's
buy some fixed income today", but rather, due to
government regulations or their own charters, this is
what they are required to do. The investing arm,
for example, of an insurance company cannot decide, "Oh,
we are required to invest these funds in long term debt
today, but we don't like bonds at this level, so let's
go buy some Microsoft instead." To be sure, they have
guidelines that allow for some range of debt instrument
choices, but the bottom line is, again, EVERY
DAY THERE ARE, INTERNATIONALLY, BILLIONS OF DOLLARS THAT
HAVE TO BUY SOME FORM OF FIXED INCOME...somewhere, in
some country...And every country's debt is of a
different quality (safety), and carries a different rate
(the interest it earns) and is paid for in a different
currency, which, when I put all this together, leads me
to the conclusion that U.S. Treasury Bonds are currently
the best fixed income investment on the planet, and
however much gibberish you read about this or that
country deciding they might now want to own any more US
paper, this sort of talk is nothing more than political
posturing.
Consider the following if you, today, were one of those
institutions that does have funds that immediately have
to be spent on fixed income investments...
Here are some rates on various countries' longer
term debt instruments at the moment: Brazilian notes at
13%, Australian at 5.7%, French at 4.28%, British at
4.35%, Swiss at 2.57%, Japanese at 2.27%, and the USA at
4.41%...From this list, you'll note that Brazil has the
highest yield at 13%, but is also probably the riskiest
place (on this list) to invest your money, which is
precisely why Brazil has to pay a higher rate to attract
money...Australia is attractive at 5.7%, but here you
would be buying in a currency, the Australian Dollar,
that is actually at its all time highs against the US
dollar (up 100% in the the last 7 years), which is fine
if you think this will be true for another 20 years.
Otherwise, just a 10% downturn in the Australian
currency would mean a potential 10% reduction in your
total invested capital as compared to the US Dollar,
meaning that 5.7% might not be so attractive after
all...France and Britain are close to yields in the USA,
but here again, you'd be buying in a currency that is at
historical highs and therefore subject to the same
currency risk as in the Australian Dollar...Japan and
Switzerland in the 2%+ range? Not very
interesting...Then you have US Treasuries...To start
with, there ARE some smart people out there who don't
use the latest newspaper headlines to do their
investing. There ARE some longer range
thinkers who don't buy the idea that the Dollar is
headed south forever, who look at ANYTHING that is
denominated in U.S. Dollars and think, "What a deal!
Everything at a discount!", and there ARE hoards of
conservative institutional investors who do look at last
year's rally in the Dollar AND in US Treasuries, when
international fear was rampant, as irrefutable evidence
that US Debt IS the safest and highest quality paper on
the planet...No, I'm not saying that all of
these institutions are going to invest all of their
funds in US paper, but I am saying that "Buy
USA" IS going to be high up on anybody's list of "best"
choices, and just as there has been enormous
international demand for our debt, there will CONTINUE
to be enormous demand...and the idea that "foreign
buyers are going to disappear" or "sell what they
already own", is, to me, absolutely ludicrous.
The Fed stated at their Nov. 4th FOMC meeting
that "economic conditions are likely to warrant
exceptionally low levels of the federal funds rate for
an extended period"...With Fed Funds (the rate at which
Banks can borrow day to day from the Fed) basically
at 0%, and the fact that "extended period" could mean
years, I strongly believe the yield on the 30
Year Treasury, currently at 4.4%, has no place to go but
down, and by next summer (or earlier) that yield could
easily be down to 3%...If you think this
sounds impossible, aside from the fact the 30 Year
already did get down to 2.5% last year, look at Japan,
for example, where their central bank also adopted a
"zero bound" interest rate policy earlier this decade,
and their 30 year bond got down as low as 1%, and even
today stands at 2.25%...Additionally I
would note that during all of the 1940's and most of the
1950's, at a time when the United States was averaging
something like a quite boomish 6.5% ANNUAL GROWTH IN
GDP, even then, Long Term US Treasuries were yielding
between 2 and 3%...Don't think that just
because this happened over 50 years ago makes it
impertinent to today's world. Economics is still
economics, in whatever century you want to reference,
and just the fact 2.5% long term rates are already the
case in Japan and Switzerland very much substantiates
the possibility the same thing could happen here in the
United States.
And I would make, FINALLY, just a few more
observations as to the rate markets:
One, the bail outs will not go on
forever, and the current pace of US borrowing
(issuing of debt) WILL diminish, meaning less supply
coming to market.
Two, even with the massive borrowing the
US has already done to help turn the economic tide
here in the USA, long term rates have barely moved
up at all...And, EVERY US Treasury
Auction during the last year, HOWEVER big the amount
of debt being offered, whatever the yield, has been
basically "gobbled up" by the fixed income buyers of
the world...which, to me, can only be taken as
indicative of the inherent, underlying strength of
US Treasuries in general.
Three, I believe wages and world
commodity prices, on balance, are NOT moving
higher...And inflation will NOT be a concern for
years to come...which the Bond market will
definitely "appreciate", and Bonds, therefore, will
move higher in price.
Four, the USA is in a recovery, which
will eventually mean expanding tax receipts, and
less government borrowing (similar to
what was experienced by the tail end of the Clinton
administration), and with all of this taking place
in an environment of less excess by all,
and I would add, together with the
fact we will no longer have to finance the war in
Iraq (BIG MONEY,and possibly Afghanistan (we will
get out at some point), several years from now the
fiscal situation of the United States will be
dramatically improved and the concept that "nobody
wants our bonds" will have proven to be nothing but
absurd.
So I'll repeat: I am a buyer in the March
and June 2010 Treasury Bond Futures contracts,
expecting to see at least a 1% to 1 1/2% decline in
30 Year Treasury yields within the next 6-9
months...and, at least, a commiserate 15 to 20 point
rally ($15,000-$20,000 per contract) in the Treasury
Bond futures market.
What Stocks will do...
As I usually have little interest in trading the stock
indices (they have always seemed impossible for me, even
when I'm right), I really do try to stay away from
predictions as to where the equity markets are
headed...and right now, following the recent blistering
rally, I am even less inclined to do so...especially
when I've already got a zillion words wasted here on
markets I do want to be trading...So my comments
here will be VERY brief (thank you, Bill).
1. For many months now, as the market has been in this
non stop rally, all of my stock broker buddies have had
zero (and I mean ZERO) interest from their clients in
anything to do with equities.
2. You have to assume those businesses who are still
standing today are most likely leaner, while also
competing against less competition, with
slightly lower energy and overall raw material costs,
cheaper labor (as I said before, there is no
upward wage pressure today), lower interest rates, and
finally, I'd suppose, a HELL of a lot of pent
up consumer demand that has been laying low for several
years now, in just about any purchasing area you want to
name...And all of those factors probably add up to an
excellent climate to now be doing business, which in
theory, would mean look for a higher stock market...
3. As stocks are, to some extent, supposed to be a
barometer of future economic activity, my guess is the
3700 point rally in the Dow is presaging some excitingly
positive economic numbers in the fairly near
future...And as the belief grows that the economy is OK,
the public, which, again, has not actively participated
as buyers in the last six month rally, will begin to buy
again...Unfortunately, the may be doing so from even
higher levels, or maybe lower, but the significant thing
will be their decision to finally buy again will have
come "after the fact" (when the news finally gets good)
and my guess is, six months from now, whatever they have
recently bought will generally then be losing them
money.
In other words, I think the news is going to
be getting better, but the market, from somewhere soon,
will begin a long slow grind to the downside. I have no
idea how far it will go (or let's face it, even if I am
at all right about any of this), nor for how long the
sell-off will in force...But I do think, for some of the
reasons I expressed earlier, that the crisis has passed,
the world is not coming to an end, and we are not headed
endlessly back down in the stock market.
I want to be short a number of
traditional commodities...
As I mentioned before, one of the most popular
opinions around is, "Commodities are going up!", and
Wall Street is therefore doing their usual thing of
seemingly creating a new hot product every day, in the
form of commodity ETF's and Index Funds, to "capitalize"
on the public's willingness to buy into this latest,
greatest, New York inspired "story".
I have been working in the futures arena for half of my
life now (Good God!) and one of the earliest lessons I
learned in this insanity, the HARD way, is, "popular
ideas tend to lose money". Yes, this is just another
variation of "the crowd is almost always wrong", but
this so perfectly logical case for commodities going
higher, that I see expressed everywhere, is virtually
identical to what I was hearing when I went to work for
Merrill Lynch Commodities in 1980...Some of you will
know that prior to being hired, I was not even aware of
the existence of the futures markets, and so
I came into the business with a totally blank mindset as
to what this stuff was about...The first thing I
noticed, and naively fell into agreement with, was
EVERYBODY thought EVERYTHING was a buy, for a 1000
highly "sensible" reasons, and NOBODY ever, ever
imagined that any of the traditional commodity markets
were a short...which was basically what they all were
for a good 4 or 5 years to come...And this is kind of
where I think we are once again...
I don't think we'll necessarily see commodity
prices experience a 4 or 5 year decline...but I do think
the following market all have potentially MAJOR downside
potential...
And I WILL be brief...I am as tired of
writing this thing as you are of reading it...
Still short the Soybean
Complex
I have been on this trade all year, primarily using the
Soybean Oil contracts, and to be honest, the incredibly
long sideways move has done nothing but lose us money.
It has also done a pretty good job of wearing me out
psychologically...BUT...I still look at this
market and cannot think anything but a MAJOR decline in
price is coming and I intend to stay on it.
Record high prices do usually inspire record production
and that is exactly the case today in Soybeans.
World production for the 2009-2010 crop year is
currently projected to be 18.7 % higher than last year.
This is an ENORMOUS single year increase, and I very
firmly believe, at some point the market is going to
reflect the fact that there IS no shortage of
soybeans...and this now 13 month consolidation is going
to "suddenly" become one those STRAIGHT DOWN bear
markets I have seen "surprise" the masses hundreds of
times...I'm beat up...But I still think this
is one of the best "2 and 1's" I have ever seen and I am
staying firmly, and aggressively, on the short side.
Sell Sugar
See the chart below. It's up. Yes, it went to 45 cents
back in 1980 but that was a totally manipulated
situation taking place on the back of the Hunt brother's
attempt to corner the Silver market...It's grown in
every tropical country you can imagine on the planet.
It's up this time, more than anything, in conjunction
with Brazil's use of sugar to produce ethanol. A 10 cent
($11,200 per futures contract) sell off between now and
next spring would not surprise me in the least...This
can be a nasty market, and once it does start down, I
would look for the move to be unrelenting and brutal.
Sell Cattle
I was on this last year when it broke down from record
highs and then again earlier this year while it went
sideways...Even though I think the economy is
definitively turning back up, by no means does it mean
the beef market has to go up with it...After all, cattle
are still coming off record all time high prices, and
when cattle producers expand (encouraged by those
record prices) they end up with a lot of animals that
have to go through the whole year long fattening
process...And as pretty much all I have seen from cattle
people during the entirety of this year's sideways move
is talk of "historically tight supplies" and that a
"bottom was being made", my guess is there
are a LOT more cattle out there than anybody is
expecting...Put that together with the general chart
look below, as well as the fact that EVEN A 3700 POINT
RALLY IN THE DOW DID NOTHING FOR THIS MARKET, and I
think you come up with extremely bearish
possibilities...
I have often pointed out that some of the most dynamic,
non-stop, one directional market moves that you ever see
take place in the meat markets...And I think that is
about to be the case here...A 30-45 day 10-15 cent
($4000 to $6000 per futures contract) collapse would not
surprise me at all from here...
Sell Crude Oil
It's not worth $75-$80 a barrel. We're NOT, as trumpeted
last year, running out of it. For sure, some day we
will, but I maintain that even $50 oil has the refiners
going all out to produce everything they can, whether it
be in exploration, new methods of extraction, recovery
or whatever...and while also remembering that just 5
years ago, $40 was a sky high price for crude, I'd then
say that a $25-$30 fall in Crude Oil would really be no
big deal at all...What I specifically recommend would
probably be to short the Heating Oil market as we move
into the heart of the winter season...One of the
perversities of the futures market has always been that
many markets "surprisingly" go down precisely when you
would expect for seasonal demand to be pushing them
up...And I will probably be looking to get short the
"Heat" when the first BIG blizzard blows into New York
City.
I'll put something out on the Heating Oil if I think the
trade does have a good short "set up" further along
towards Winter....
If you read this whole thing, I thank you. I am an
idiot.
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