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August 13, 2008
A lot continues to happen all over the markets...
I can't help but note how the media is seemingly dead certain
the 27% decline in Crude Oil almost "guarantees" the resumption
of a bull market in stocks...My own feeling is stocks have done
very little on the upside with the oil sell off, and
seeing the Dow make new 2008 lows just doesn't look that
difficult (see chart below) to me...And if the yearly low
on July 15th low is taken out, it's sure going to look like the
last month's action was nothing but a brief pause to sucker some
money back into the market...and the move from there on down
could get much nastier than the relatively slow grinding sell
off we've seen since last October...I still think the
Dow is headed, at least, to the mid 9000's or so...
Whether or not it actually has anything to do with what moves
the markets, I can't imagine the housing thing is about to
suddenly improve (especially as we now head towards fall and
winter) and the upcoming election must have many business plans
on hold...And the consumer? Even though gas prices have come
off, I think the average middle class American family is still
gasping for air and consequently the economy is no where close
to turning upward.
Still Buying Treasury Bonds
I continue to expect a MAJOR bull move in Treasury
Bonds between now and year end as long term interest rates fall
dramatically. With commodity futures prices
having basically begun new BEAR markets (in my opinion) and
the economy currently going the "wrong" way, the last thing I
would expect from the Fed is higher interest rates...I look for
inflation to totally disappear as a threat (which didn't seem to
dent Bond prices anyway) and jump starting the economy to become
more and more and more of a Fed concern...If this is the case,
lower interest rates, meaning higher bond prices, is the first
and most obvious place to start.
I would also point out that in 9 of the last 10
years, the December Bond contract (shown below) has had at least
a 10 point rally at some point during the calendar year.
In fact, those rallies have ranged between 10 and 19 points with
the average having been 13.88 points ($13,880 per futures
contract). Maybe these are irrelevant statistics, but the fact
is, so far this year, the biggest rally to date in
the December 2008 contract is 5 3/4 points...
Still Short Soybean Oil
As mentioned in my August 7th newsletter, we took fairly
big profits last week but maintained our short position in
Soybean Oil by "rolling down" from the 60 & 61 puts to the 50 &
51's, now using the 52 calls as our defense (2 puts to every
call). Even though I look for this market to reach the low 40's,
with the size of the recent sell offs in Corn and the Soybean
complex, there is obviously the potential, at any time, for
sharp rallies, as evidenced by today's limit up moves in Corn
(+30), Wheat (+60) Soybeans (+70) and Soybean Oil (+2.50). In
general, if this rally carries roughly another 3 cents higher in
Soybean Oil, I estimate we will be able to recover 100% of our
current investment by selling the then profitable calls plus
whatever the puts are worth...and will then most likely
reposition the whole thing short again using higher strike
prices...Otherwise, it wouldn't surprise me at all to see
these rallies fail fairly immediately in which case we will just
sit on our existing short positions. For a "guide" as to how
bear markets DO produce rallies that look like upside reversals,
using Wheat as an example, see my July
17th newsletter.
Corn
Maybe I'm dead wrong here but I'm fairly sure the vast majority
of traders will see today's across the board limit up markets as
a "confirmation" we've finally seen the lows they've all been
predicting for many weeks and many thousands of dollars per
contract now...Maybe this "bottom" will only last a day or two,
or maybe even weeks, but as we carry on towards a plentiful
soybean harvest, I still see agricultural weakness coming,
specifically in the soybean complex and plan on maintaining
short positions there.
Still Selling Cattle Complex
I still think the Cattle market is somewhat in "LaLa" land and
will soon go the way of all the other commodity price failures
we've seen lately. I continue to remain short both the Feeder
Cattle (cattle bought to place in a feedlot to be fattened up
for slaughter) and the Live Cattle (cattle ready for slaughter).
According to the futures markets, the price you pay for beef
will be rising sharply over the next 3 to 6 months. In this
economy I just don't see it...And I also know that the cattle
raising crowd has been all "bulled up" for the entirety of this
year, expecting stronger and stronger cattle prices, which
raises the possibility (and not for the first time) there are
a LOT more steers in the pipeline than anybody is prepared for,
and overwhelming supply might just be now meeting weak
demand...and prices will be heading down, not up, and maybe in a
very big way...As I often point out, the meat markets more
frequently become stupidly one directional than any markets
there are.
As regards energy, I think the most logical thing is to suppose
Crude Oil probably has begun the formation of a long term top
that will be characterized by a 5-6 months of violent up and
down swings before heading south for the winter. On the other
hand, this WAS the biggest, baddest, loudest and supposedly
never ending bull market out there, and its reversal, so far,
has only been for 27%. When you consider the almost routine
35-45% futures markets retracements of the past 2-3 years,
this could easily leave the door open for a hell of a lot more
downside before oil stabilizes. The important thing, I believe,
is Oil died because it was crushing the USA and world
economies...and still probably is even at $115...and $150 Crude
Oil (and everything energy related) will end up being like the
Dotcoms of 2000...In other words, don't expect to
see $150 Crude again, if ever, for a long, long time.
That's enough of my claptrap for now...Except to just say, the
winds have been a little lucky for us lately, but believe me, I
have no illusions it has anything to do with intelligence...
Call me if anything here interests you, or if you have your own
ideas you'd like to kick around.
Thanks,
Bill
866-578-1001
770-425-7241
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