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January 15, 2014

I have no allegiance to any market. I neither favor the long or short side. All I am ever doing is trying to make the right choice about which way (and importantly, is it now?) any market is heading.

These are ideas that I think have potentially large payoffs going forward from here…with a bit of my reasoning as to why I like these ideas…It goes without saying that just because I think these trades could produce large profits does not mean they will. As always, I might be dead wrong and if I am you will probably lose money.

 Buy Treasury Bonds

This goes dead opposite what seemingly 99% of

Wall Street is telling you.

I am not buying bonds just because I am generally regarded as ever the contrarian. I am buying them because the so massively popular supposed “logic” that “rates have to go up” (and Bonds go down) simply because the Fed has begun to taper is ludicrous, just more of the typical myopic, wrong way reasoning that is forever being spewed out by the banks and brokerage houses. WHEN have they ever steered you right? How many times do you have to buy in to their erroneous thinking to understand that just because some joker (but articulate, well dressed, personable) has been classified as an “analyst” DOESN’T mean he has a CLUE as to what to do with your money…doesn’t have the smallest inkling of what direction the markets are heading? These are just guys with jobs who probably haven’t received their title due to any special acumen. They are just people to whom some boss once said, “Harry, we want you to bone up on interest rates and be our ‘expert opinion’. “. Virtually ALL of those guys you see on TV and the internet got there the same way. They are basically sheep and they sound good. They generally know everything about whatever their area of “expertise” is, except for one small detail: Which way the market will go.

Excuse the tirade but I LONG ago realized, while working 11 years inside the brokerage house environment, the overwhelming majority of those oh-so-polished and well spoken mouthpieces actually don’t know squat about the markets…And I therefore trained myself to recognize when they were unanimously trumpeting the same sheep-to-the-slaughter “logic”. Just like Dotcom Crash, or the Mortgage Debacle, or Stocks in 2008, or Gold a year ago, or 100’s of other major occasions, THEY DON’T KNOW…And right now, and maybe I’m  the old fool here,  but I AM FERVENTLY OF THE OPINION THEY ONCE AGAIN HAVE IT BACKWARDS ABOUT INTEREST RATES AND THE BOND MARKET. RATES DON’T HAVE TO GO UP AND BONDS DON’T HAVE TO GO DOWN…AND FURTHERMORE, WHAT  CAN BE IS BONDS ARE IMMEDIATELY READY TO RALLY QUITE SHARPLY FROM CURRENT LEVELS.

If you want MY full blown logic, you can read my recent newsletters, , but here are a few very quick reasons:

There are many billions of dollars, every day on the planet, that are going to buy Treasuries and other quality long term paper….TODAY…no matter what the interest rate it is earning.

The Fed’s $4 billion a day is a drop in the bucket compared to the almost $900 Billion that is traded, DAILY, in fixed income just here in the USA…not to mention what gets traded each day on the rest of the planet.

The Baby Boomers have been major consumers and major equity buyers for decades. Now they are/will be buying Bonds…and NOT for just the next year or two.

Inflation is non-existent and if all the Fed’s fiscal pumping didn’t produce inflation, what will?

Anyone who is reading this must have some understanding of how this game works on occasion…How you finally reach that point in a market where price action and all those “experts” touting the same story ends up with EVERYBODY loaded up on the idea, and everybody jumping on ALL the bandwagons heading in the same direction…And then the market turns…and goes viciously against them all…If this isn’t the Bond market right now, then I’ll be willing to admit I’m the one who doesn’t have a clue about the markets.

Aside from the fact you can read that foregone conclusion, “Now that rates are headed higher”, in seemingly every financial article ever published today, the total unanimity of bearish opinion can also be easily seen in the Ten Year Note Commitment of Traders chart following here…which is about as clear a picture of which way interest rate traders (the biggest sheep in the markets I think) are leaning as you could ever get…

Note 1 – If you were ever inclined to pick up the phone and call – even a little – this is the time. I would enjoy hearing your voice.




If this whole chart looks like a bunch of gibberish, just understand the comments I have made…The Ten Year Note is THE interest rate instrument that all the yakkity yak talking heads are forever referring to when they are opining on the direction of interest rates, and in this very contract, Small Specs, PERENNIALLY the biggest losers in futures trading, now have their second largest short position in history, and are currently the most short they have been in 8 years…and Large Specs are pretty much right there with them…And on the other side of this trade, directly opposite all those speculators, the Commercials (hedgers) are now the most long they have been in 9 years.

No, this absolutely does not mean Treasury Notes and Bonds have to go up, but for my money (and for all my very solid reasoning), this is the first place I want to have as an investment in 2014.

I assure you…Rates DON’T “have to go up” and Bonds DON’T “have to go down” (again, see my recent newsletter) and I believe all those people piled on the short side are going to lose their shirts.



Here are a few ways to go…


Or this in the June contract…


Interestingly, I’ll point out that traders are so bearish that the June contract is already priced almost 2 full points under the cash market. In other words, cash is currently about 131, meaning if cash just goes sideways until June (which it never does) this contract would go off at 131 or so…This is why I like the 132 calls, as they are almost like buying an at-the-money option for just a little more than one point ($1000).

BUY BONDS…especially any of you guys who have been on this ride with me before.

Updating a few previous recommendations…

We are no longer Short Wheat…

As was the case a few months ago in Corn, we are now out of all our long standing Short Wheat positions, and have been so since late December. While I suspect there still may be more to go on the downside here, I can just as easily envision something of a sideways market for the next few months (same as Corn) and therefore prefer the sidelines.


 Also have temporarily moved to the sidelines in Soybeans

The sideways action in Soybeans has been my biggest nemesis for quite some time…when you get down to it, for over TWO YEARS now. However, with Corn and Wheat having broken down some 40-50% in the past year, and with Soybeans still trading at almost 3 times the value of Corn, I continue to see Soybeans as having the potential for AT LEAST $3 to $4 on the downside…at some point between now and when July goes off the board. Nevertheless, along with Wheat, I moved to the sidelines in late December but am currently any given day away from repositioning those shorts in Soybeans…


 Still Recommend Short the Stock Market.

Look for the first half of 2014 to be down…

The Stock Market has continued higher since I began recommending the short side on December 11th…but this has not changed my opinion in the least. I don’t know the exact path, but I still look at equities and think, “This is going to be a bad year to own…or buy…stocks”. As I have written for some time, I strongly believe the economic numbers are going to get better and better throughout the year…BUT…this does NOT mean stocks have to continue higher. Investing IS a mob psychology game and I believe one aspect of the game in 2014 will be better economic statistics keeping investors hopeful…while the markets disappoint (and befuddle) them by falling continuously, most likely at least out into the 3rd quarter…I see the current rally (new highs in the S&P and NASDAQ) as only further cementing in analyst’s and the public’s minds that UP is the only thing they should expect in the year ahead…and this mentality (together with those eternally “better than expected” economic reports) is nothing more than one new version of the same Wall Street trap we have all seen more times than anyone can count.

One scenario I might expect, would be to see the markets seriously lower (like 15-20%) heading into September and October, with investor angst, and blood, all over the place, and all sorts of scary talk of those two months being the “worst months of the year for stocks”, and MAYBE then, equities will be a buy again. But right now? I think stocks are absolutely a short and I continue to recommend buying puts in any or all of the three major indices (Dow, S&P, NASDAQ).



Short Cocoa

I have not traded this market for over a decade but it has had my attention for some months now, due to nothing more than the Commitments of Traders chart that immediately follows…as well as evidence of a whole lot of supposedly bullish analytic talk…


To further clarify, the Commitments of Traders Report, compiled by the Commodity Futures Trading Commission, comes out weekly and offers a breakdown of what the net positions are of various groups of traders in the markets. The three principal categories are Large Speculators (funds), Small Speculators, and Commercials (hedgers-entities that actually produce or use the product).

While Commitments, by no means, are an absolute indicator, they do often offer clues as to what might be expected in a specific market, particularly (I believe) when those positions reach extreme levels…as is now the case in Cocoa. Plainly stated, Large Specs are extremely long and Commercials are just as extremely short, meaning these two “forces” are directly opposite each other…And my experience suggests the eventual outcome in this “battle” will be a potentially sharp decline in prices. In other words, the Commercials will “win”, and specs who are long, will “lose”.

As I noted above, I have been watching this situation develop for some months now, and per my belief many markets crank up moves right out of the new year, I think the timing may be perfect to now be short in Cocoa. My basic idea is to start by owning slightly out-of-the-money puts in the May contract with the assumption the odds favor some sort of break down between now and expiration. I think May allows for a decent amount of time, and beyond that, when I think in terms of what sort of move might be expected, the May options appear to have considerable leverage.

And here is one option I like…


 Short Crude Oil

I always hate messing with this market as the options can be so expensive…but right now I think they look cheap relative to what Crude can do…And very much like the Cocoa market, Large Speculative Traders are more long they have ever been, while Commercials are exactly the opposite…Additionally, as can be seen on the chart following, these same previous extremes have been followed by fairly sharp collapses in Crude Oil prices…While this certainly doesn’t mean the same thing will occur right now, I think the bet is a good one…


Aside from commitments, my impression is that the prevailing media attitude seems to be, “Crude can’t fall below $90”, that there is too much demand for it to do so…But for my part, I can’t help but believe the WORLDWIDE developments in fracking MUST be changing the supply-demand equation to some extent, and where 5 years ago all the “peak oil” production nonsense was able to drive prices up from $30 to $150, it therefore now seems quite plausible that even $90 Crude Oil is vastly overpriced…And if so, why couldn’t we be headed back to $60 or $70 a barrel? Do understand, I’m not trying to make a big statement about oil prices going south for years…just that, RIGHT NOW, I think a bet on the short side is a great one…And when I look at the price chart above, I DO think, “It was at $70 in 2010. Why couldn’t it go there again?”.


Note 2 – Please consider Note 1, and as always, my best wishes in everything you do.






The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Treasury Bonds

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