January 14, 2017
I keep banging away on this because the Eurodollar market has floated up a bit in the past few weeks as the misperception has again grown that the Fed will be on a “go slow” schedule in raising rates…Part of this is undoubtedly due to growing number of brokerage house calls for the stock market to back up in conjunction with Trump being inaugurated…as well as ideas that he will be pushing his plans for creating growth and “Jobs! Jobs! Jobs!” out until later in the year…thus potentially meaning the Fed can now just sit back and take a ho-hum approach to moving rates up from the lowest levels in modern history.
The worst time to make a trade is when everything you hear argues unanimously for your opinion…And one of the best times to take a position is when your OWN analysis tells you what makes sense…but the rest of the crowd is still either dead opposite that opinion…OR simply undecided (“waiting to see what happens”)…And this IS the case right now in stocks and interest rates…To be specific, there IS still a debate going as to if stocks will keep going from here…and There IS still a debate as to how quickly, and how big, interest rates will be going up from here.
But for me? There is NOTHING to debate…I think it is absurd to be assuming anything but a ragingly pro-business/pro-stocks environment as we go forward in2017…and I think it is absurd to be assuming anything but that rates will be marching steadily and UNCEASINGLY HIGHER for the balance of 2017.
And Higher Rates means…
BE SHORT EURODOLLARS
(for the 100th time)
Among a number of bearish factors for Eurodollars, I keep coming back to the FACT that just two months ago, there was not a Fed governor anywhere who was expecting to see the unimaginable team of Donald Trump and a SOLIDLY Republican Controlled Congress…with all of the implied economic stimuli and inflationary ramifications they absolutely DO represent…especially when their stimuli IS now going to be added to an economy that is already operating at a 3% GDP growth rate with 4.7% unemployment…NOR is there a Fed governor anywhere who expected to see the stock market…an economic barometer of the future…doing anything like it has done (and is continuing to do)…To the contrary, as we all know, the almost unanimously predominant opinion was that a Trump victory would be bad for the stock market.
When I consider that even before the election there were a few Fed governors arguing that rates would be going up faster than analysts and the markets were anticipating, I can only conclude that the Fed IS now already very much behind the curve, and similar to what we have seen in almost every case of Fed interest rate increase campaigns in the past, I believe EVERY Fed meeting from here going forward will result in at least a 1/4 % move…AND similar to all those previous campaigns, there will also be some MONTHLY increases (in between meetings) and some cases where they go for 1/2 instead of 1/4…all of which REALLY will add up over the next 8-12 months to MUCH higher rates than the Eurodollar market is currently accounting for.
It’s the new year…There is NO China “fear trade” coming. There is no Brexit vote. There is no “election uncertainty”. There are none of those garbage ideas that were presented by Wall Street throughout 2017 as reasons to doubt stocks and the economy… ALL we are going to see, at least for many months to come, is nothing but “Let’s GO!” news, and along with that I cannot imagine anything other than an EXTREMELY positive environment for stocks, for business, and job growth, and wage growth, and consumer confidence AND spending…Throw into the mix that I also absolutely believe this is going to be a GIANT spring for Residential Real Estate…meaning lots of activity AND nothing but increasing housing values for homeowners (similar to the 1990’s) with a resulting “wealth effect” that IS a very real factor as regards consumer confidence and consumption.
As always, I might be dead, dead wrong, but I CANNOT BE MORE ADAMANT THAT I BELIEVE THE MOVE UP IN INTEREST RATES HAS SERIOUSLY BEGUN AND THAT THE BACK MONTHS OF EURODOLLARS DO NOT EVEN COME CLOSE TO REFLECTING WHERE RATES WILL BE BY SEPTEMBER…AND IT ABSOLUTELY MAKES SENSE TO NOW BE BUYING SEPTEMBER PUTS…
It may sound nuts, but per my studies of previous Fed rate raising campaigns…there is the very real possibility of 1/4 % increases on a monthly basis going forward, and rates COULD therefore be up as much as 1.75 % by September…meaning Sept would then be trading in the 97.25 area…which, again, may sound crazy…but it also drives home (for me) the idea that getting down to 98.00 in the September contract, currently at 98.62, should be EASY…
AND TO PUT THE CURRENT MARKET TRULY IN PERSPECTIVE…RIGHT NOW, WITH SEPTEMBER AT 98.62, THE EURODOLLAR MARKET HAS SO FAR ONLY BUILT IN A .35% MOVE UP IN RATES OVER THE NEXT EIGHT MONTHS, OR JUST SLIGHTLY MORE THAN A 1/4 % MOVE.
THINK about that…and I’ll repeat it…The mob psychology perception is for just a bit more than a 1/4 percent move between now and September.
And just as a reminder as to HOW RATES DO TEND TO GO UP, here (from my Dec 14th newsletter) is how the past four Fed rate raising cycles unfolded:
Feb 1988 to May 1989 – From 6.5% to 9.75% - 3.25% INCREASE IN 15 MONTHS.
May 1994 to Feb 1995 – From 3% to 5.25% - 2.25% INCREASE IN 8 MONTHS.
June 1999 to May 2000 – From 4.75% to 6.5% - 1.75% INCREASE IN 11 MONTHS.
June 2004 to June 2006 – From 1% to 5.25% - 4.25% INCREASE IN 24 MONTHS.
And also as a reminder, from my November 29th newsletter, here is how the Fed worked it the last time they raised interest rates…
June - +1/4
Aug - +1/4
Sept - +1/4
Nov - +1/4
Dec - +1/4 up 1.25 % after 6 months
Feb - +1/4
Mch - +1/4
May - +1/4
June - +1/4 up 2.25 % after 1 year
Aug - +1/4
Sept - + 1/4
Nov - +1/4
Dec - + 1/4 up 3.25 % after 18 months
Jan - +1/4
Mch - +1/4
May - + 1/4
June - + 1/4 up 4.25 % after 2 years
The fact is, ONCE THE FED DID START RAISING RATES IN JUNE 2004, THEY RAISED THEM AT 17 STRAIGHT MEETINGS, usually at two month intervals…BUT ON FIVE OCCASIONS THEY HELD SPECIAL MEETINGS TO RAISE RATES IN BACK TO BACK MONTHS.
All that being considered (especially with what I think we are about to see coming out of Washington) it is EASY for me to envision rates being AT LEAST 1.75% to 2.00% higher by the end of 2017.
Here is the option I am buying right now…
After a small consolidation for the past 3 weeks, I think the Eurodollars are now on the move again…I STRONGLY BELIEVE IT MAKES SENSE TO NOW BE BUYING THE SEPTEMBER 9850 PUTS SHOWN BELOW…
And here is the long term picture…And in a sense, I think this chart speaks for itself…
The markets are closed during the day on Monday but reopen Monday night…and I WILL be buying more puts then.
I continue to believe THIS MOVE IS JUST GETTING STARTED. And I continue to strongly recommend using the Sept contract to add to positions…or initiate totally new ones.
Give me a call if you are interested.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: