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 January 15, 2010

 I’ll start with a quick review of my 2009…It can basically be summed up in one chart…


 Yes, I made a few other calls but I pretty much sat on this one idea all year, which was costly and psychologically discouraging…BUT, the fact my short Soybean Oil recommendation was a loser does not mean it will continue to be so, nor does the pain of enduring this sideways move indicate I should abandon the “2 and 1” approach. The truth is, I believe the odds have now gone skyhigh that a major move will occur here in 2010, and probably sooner rather than later, so I am absolutely maintaining/increasing my short positions in this market. I still think this is a MONSTER trade but before getting into specifics I want to first make a few general comments about the economy and markets as a whole.

I have spent the last three weeks examining the markets from every angle I could imagine… and now have a head that is way too full of information with which to bore you…But I do have some fairly firm, and I think quite sensible, conclusions as to where there is money to be made during the first half of 2010. So, what I’ve tried to do here, as concisely as possible, is show you some of what I think and why…and hopefully present you with some ideas you will think it worth the RISK to invest in.

Yes, 2009 was a lousy, lousy year for me…but all of you who have known me for these many years may take heart in the fact some of my best “work” in the markets has come following some of my many (and in this business, statistically unavoidable) failures. As always, my primary objective is to make you money, and hopefully in big multiples, as I win when you win, and believe me, I lose when you lose…So, let’s see what happens in this new year…

 I’ll start with…

What do the talking heads unanimously agree on?

Because you KNOW they are all just bleating the consensus view,

and following them is persistently a great way to lose money…


As we enter 2010, there currently appear to be two of these absolutely unanimous opinions…

1. “Interest rates gotta go higher”. In fact, just yesterday I just watched a panel of four boobs, from four different newswire/internet sources, none of whom looked like they had ever actually entered a trade in their lives, talking “educatedly” about the “Bond Market Bubble” and the “fact” that the billions of dollars the public was investing in bonds was basically stupid money…that “everybody knows rates have to go up”, and therefore buying bonds now (which decline when interest rates rise) is a surefire way to lose money.

These four people…again, from four totally independent organizations,…easily represent a microcosm of the seemingly unanimous, totally bearish opinion on the bond market. You know, and I know, that if every time you saw four Wall Streeters all mouthing the same "logic", if you always went the opposite direction, you’d probably come out far, far ahead of the game.

Not just to be a contrarian, but I think they are so dead, dead wrong…

I believe long term rates are going down, NOT up…and the 30 Year US Treasury Bond, which is currently yielding 4.7%,will hit 3.0% by next fall…If so, Treasury Bond futures, currently trading around 117, would then be somewhere in the 135 area, or approximately $18,000 per futures contract higher in value. I would also add that I think you will also be seeing standard 30  year mortgages being done at less than 4 % (which will, by the way, go a long way towards helping “reliquify” the American public).

I’ll get to a few futures market specifics and reasons for my opinion on Treasury Futures a little later…

2. “Now is the perfect time to invest in Commodity ETF’s”. Probably the single most popular investment concept I see touted everywhere, and I’m sure you’ve seen it as well, is this idea about investing in Commodity ETF’s…that “all this money the Fed is printing will SURELY lead to inflation”, and if you want an “inflation hedge” you should invest in Wall Street’s latest (and innumerable in choices) hot product…Commodity ETF’s.

Yes, commodities have been hot (kind of, after getting MURDERED in late 2008), and the “too much money in circulation” story seems to make sense (but believe me there is another side to the equation), so everybody in the brokerage business is trying to capitalize on this hyped up inflation theme by creating bandwagon products that they KNOW some percent  of the public will BUY from them…and they are coming out with so many of them it almost seems like a “latest flavor of the week” sort of thing.

My impression?...I believe speculatively invested capital in “products” which will benefit from the blanket assumption commodity prices are going ever higher is money that is doomed to disappear.  For one, if you are NOW a commodity buyer, you are getting on board when a heavy majority of traditional commodity markets are, with the exception of the 2007-2008 mania, STILL trading above their previous 10, 20 or 30 year highs…Yes, just because a market is high does not mean it can’t go higher, but high commodity prices DO spur increased production, and all time record prices can stimulate a LOT of production (as in world record soybean production in the coming year), and for this and other reasons, I think the much ballyhooed coming inflation will turn out to be exactly the opposite for all of 2010…that virtually all commodities will be going down and inflation this year will be either nil, or even negative…and one result, other than a lot of commodity ETF owners getting fleeced, will probably be a skyrocketing bond market.

Beyond these two consensus views, there are still a few other one sided opinions (bullish Gold and bearish Dollar) but I’ve addressed them both in previous newsletters, and in the interest of brevity (please, Bill), I’ll just say I continue to believe Gold is going in the tank and the Dollar is going substantially higher…


Regarding the possibility of inflation, here are a few charts that I think are worth a look…

First up is a gauge of how "busy" factories are...When Capacity Utilization gets high, and stays high, is when you might look for “full bore” production to be exerting upward pressure on inflation. When industry as a whole is relatively slow…as is obviously the case now, to suggest that inflation is “maybe just around the corner” is sheer folly. Yes, from the way this chart has “acted” for the past 50 years,  I would expect to now see Capacity Utilization continue climbing again, but I would guess we are YEARS away from capacity levels one might associate with the possibility of inflation.


This next one is of “MZM Money Stock”, which is one means to measure the liquid money supply (or simply put, the liquidity) within our economy. Yes, the Fed WAS pumping funds into the economy, but this chart of MZM, expressed in its percent change from a year ago, indicates those funds are definitely being soaked up by the economy…and WITHOUT creating inflationary pressures. In reality, what you see here is one indicator that may be saying DEFLATION is still much more of a possibility than inflation…I mean, here they’ve pumped all this money into the system and it’s just kind of fizzling away…I have to admit I flunked the only semester of Economics I ever attempted (but back then I was flunking everything…that it was 1969 and college life for me was not necessarily about academics) and I can actually only barely explain the intricacies of M1, M2 or MZM, but I do know that this chart says any fears of “too much money jacking up prices” are presently unjustified.


Energy prices can obviously also affect inflation…I don’t know how low Crude Oil will fall from here, but from the next chart of West Texas Crude prices, measured in their percent change from a year ago, I cannot help but think we’ll see this market back at least in the low 60’s within the next 12 months…Why?...Look at every “spike” that has occurred on this chart for the past 40 years and note they ALL come back down, usually somewhat quickly…When you see this chart on the zero line, it means the price is the same as it was a year prior. When you see it under zero, say at -20% (which there are plenty of), it means it’s 20% lower than a year ago…Six months ago, oil was in the low 60’s…This stuff ISN’T invincible. It trades up and down just like all commodities and six to nine months from now, my guess is you will have seen this chart do what it’s done over and over and over, which is reverse sharply back down towards the zero line, meaning oil most likely would have found its way down, at least, into the $60 area…As Crude Oil options are eternally priced out of sight I have no intention of trading this market, but if I am right about declining oil prices, this is one more reason to dispel any notion of inflation being a problem…whatsoever.


When too many people are looking for too few jobs, one thing you don’t get is upward pressure on wages. In times like these most people are just trying to hang on to the job they have, and are not asking for more money (in fact many people end up working for less), and “wage inflation” becomes almost nonexistent…Aside from people actually earning less, in this sort of environment, you could also suppose that spending habits generally tend to contract. In other words, the next two charts, which should give you a clearer idea as to how bad the employment situation really is, also, definitely do not support the idea of “impending inflation”.



Here is one more ugly, but perspective-lending, picture…Who knows how many jobs or how much consumption is actually tied to the construction industry?


The point with all these charts is not to point out how bad it has been (or is) out there in the real world…I actually believe we have already seen the worst and several hundred years of American economic inertia is already beginning to exert itself on the upside…What I wanted to show you is, in spite of any optimism I have regarding the economic future of the United States (or the world), right now….RIGHT NOW, as we begin 2010, I think that any investment that involves a bet on any significant degree of inflation is destined to lose money…In my mind, there are far too many signs to the contrary and far too much current weakness to suppose that we are suddenly going to be beating each other over the head in a scramble to buy, buy, buy (!), WHATEVER the commodity…There are no shortages out there. There is, by no means, any excess of liquidity…And all the talk about inflation is just that…talk…And I therefore strongly believe there is potentially big money to be made on the short side in a number of commodities. And on the flip side, I think there is equally big potential for profit on the long side of Treasury Bonds.

On to specific trade recommendations... 

I feel like the boy who cried “Wolf!”,

but I still think Short Soybean Oil is a Gigantic Trade…

with more leverage than I’ve seen in years.


I’ll start with another graph…Ending stocks are what you should have “left over” at the end of a crop year as the new crop is awaited…In both real and percentage terms, the recently revised USDA estimate now has Soybean Ending Stocks at just under the all time record…


Here’s the same picture with the Stocks to Usage Ratio (what percent of current stocks will NOT be needed) superimposed…


Even though demand HAS recently been quite strong, Soybeans are still hanging around the $10.00 level, strictly, I believe, for one primary reason…speculative index inflation funds. But sooner or later, this ETF mania must reach a point where everybody who would buy the “story” has already bought it…Then we’ll just be left with a classic STALE bull market overloaded with buyers (and it could be argued even enormously more so than the norm), and the result could be a MASSIVE selloff, feeding on itself as the story dies, fundamental realities set in…and all the inflation lemmings run (selling) for the exits.




I SERIOUSLY doubt we are going to run short of soybeans...and firmly believe that $10.00, or even $8.00, is therefore a totally "artificial" price for this market...Truth is, even $6.00 a bushel would not surprise me at all.

If this market holds true to form, I think somewhere in the future you’ll be hearing farmers complaining that “these low prices (and  I mean LOW) can’t be real”. In this vein, the next chart is some technical analysis voodoo stuff, meaning it may or may not have any validity…Nevertheless, this perspective suggests a $5.00 target for Soybeans…Sounds crazy for sure but I long ago understood that futures ROUTINELY go to unimagined extremes, and one might easily assume that the extreme opposite of $16.00 might be $5.00…Although there is nothing in technical analysis that even comes close to being an absolute, I do put some faith in H & S patterns…Chart formations ARE the end result of buyers meeting sellers and some of those patterns often do give you major clues as what to expect out of a market…


 Here’s one more look at how $10.00+ per bushel is obviously inspiring farmers, WORLDWIDE, to plant more soybeans...



Again, I still consider Short Soybean Oil to be one of the

biggest trading opportunities I have seen in years

Here is our basic “2 & 1”…Go out to the July contract that gives you roughly six months for Soybean Oil to move one way or the other…Approximately 7 cents the “wrong” way would allow you to sell the defensive call and recoup 100%...Drop 7 cents, putting the market back on its lows, and besides already having the position worth at least a double, I believe the odds that this thing is truly about to nose dive would approach near certainty…


Or if you just want to lay it out there, naked, on the short side….here are several examples of the leverage available…


Or this…


Here’s the long term picture…


To put it mildly, investing in futures can be “trying”. Besides sometimes just being dead wrong, or sometimes the market doing “nothing”, seemingly forever, futures can easily wear you down to below-zero expectations (for both your psyche and your wallet), but in the end, this stuff can be quite simple…All you’re really trying to do is get on a market, in the right direction, that is going somewhere and ride with it, and as a function of the stupidly enormous leverage in this game, you CAN make a lot of money…And no doubt, if you’re wrong you can LOSE a lot of money…BUT, in essence, there are only three directions any market can be going…up, down or sideways…and with the FACT that FUTURES ARE INHERENTLY VOLATILE, and the FACT that Soybean Oil has now BEEN sideways for 15 months, even this old hack commodity broker’s common sense tells him that UP or DOWN are now the only two real possibilities left…And, yup, I may be totally ass backwards, but I think there is only one answer as to what is about to happen…and as I have kept repeating for months now…MORE SO THAN EVER, I think this market is soon going to show us a virtually STRAIGHT DOWN MOVE, MINIMALLY ENDING IN THE MID 20 CENT AREA.

I know that all of you who suffered through the entirety of 2009 with this idea have had your “enthusiasm” fairly obliterated by now (thankfully, most of you still have at least a toehold here), but, as a trader myself, I would offer that this is one of those futures market (or life) situations where you have to block out the past and approach this trade as though you were seeing it for the first time…In other words, if you do see the potential I see in this, DO put some more money on the table…Don’t  just play, “hope I make back what I lost”. Step up again…Be stupid. Call me.

And if you were fortunate enough to not be a Bill Rhyne client last year, I would then suggest this is a fantastic way to get started…Even though I may be dead wrong, believe me, I don’t lightly classify ideas as “the best trade I have seen in years”.

OK…That’s more than enough on Soybean Oil…

 Buy Treasury Bonds

While I think this is a big, big trade, and even though Bonds have always been my best market, I do not expect many takers here…which is the way it routinely seems to be in Bonds. Interest Rates always get so much press, and as this is the one market where economists, analysts and the media seem to be so perennially wrong (loud, but wrong), any time I am involved with Treasuries, my own reasoning is generally so directly opposite what 99% of the media is spouting, that convincing anybody to risk their bucks on my lonesome opinion is a massive uphill battle…I really started this newsletter intending to focus on two markets, Soybean Oil and Treasury Bonds, and if I had the energy, I could easily now put you to sleep with many pages of my "warped" ramblings on interest rates…But it is now a Saturday afternoon and I have kind of burned out on this newsletter (which I started yesterday afternoon) so I’ll just finish by throwing down some one liners on Bonds and the few other markets in which I now have positions.


      1. Repeating: Inflation will be nil. With zero inflation, Bond yields should easily drop to 3%.

2.      2. Worldwide, Baby Boomers, who bought stocks for several decades, are now (and will be) buying fixed income instead. And they don’t, and won’t, care what the yield is.

3.       3. Globally, there are  billions of dollars, every day that HAVE to buy fixed income…that day...And the fear of, “Nobody will buy our Bonds”, is a joke.

4.       4. China is NOT going to be dumping our Treasury paper…And they will continue to buy it…Russian, South African, Brazilian, etc. Bonds are not really an option for them.

5.       5. Believe the Fed. Short rates are not going up anytime soon. The spread between short term and long term rates will collapse as long term rates decline precipitously.

6.       6. The Dollar has bottomed. Internationally, there is “smart money” that understands anything bought in dollars is being bought at a discount. US Gov’t paper is attractive.

7.      7. The US Dollar is NOT going to be replaced as the world’s “reserve currency”.

8.       8. US Treasury Securities are still UNQUESTIONABLY regarded as the safest paper on the planet.

9.       9. Nobody who owns Treasuries wants to sell them.

10.  10. We have probably reached the apex of government borrowing…and still…long term rates are still lower than they were for 90% of the last decade (and the “Go Go” decade before).

11.  11. It is a fallacy that an improving economy results in higher interest rates.

 I’ve got more, but that’s enough for now…

 Here are charts and some option possibilities…


 Sorry this went for so long...Give me a call if you're interested in anything here...

Bill Rhyne


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