January 25, 2016
Short the Treasury Bond market.
Whatever course the Fed takes, I see Long Term Rates immediately beginning to rise from here…A LOT.
Like all markets, there are multiple factors that cause Treasury Bonds to rise and fall in price, but some of the major influences are the Fed (easing or tightening?), the Stock Market (rising or falling?), the Economy (growing or contracting?, Inflation (prices rising or falling…too fast, too much?), and finally, Crude Oil Prices, which have a very direct effect on inflation AND economic activity…and therefore, the Treasury Bond market.
I’m not going to take off on a long winded explanation as to how each of those factors actually does relate to, and impact, Bond prices (give me a call if you want to hear it) but will just leave it to the numerous charts that follow below to primarily SHOW you two things...One, how Crude Oil prices have DRAMATICALLY affected Treasury Bond prices, for DECADES…and two, what Bond market tops have looked like for the past 30 years…as well as, how brutally fast and big their ensuing bear market phases can be...The fixed income (bond) market is internationally massive…and it MOVES, and more often than not IT MOVES BIG.
MY BOTTOM LINE IS: I BELIEVE CRUDE OIL HAS NO PLACE TO GO BUT UP OVER THE NEXT 6-12 MONTHS (JUST TO BEGIN WITH)…AND AS A RESULT, REGARDLESS OF THE FED’S POSTURE (TIGHTENING OR NOT), THE TREASURY BOND MARKET IS GOING TO BE GOING DOWN…PROBABLY QUITE A LOT…IN FACT, I SEE THE ODDS AS BEING QUITE STRONG THAT TREASURIES HAVE ALREADY SEEN THEIR HIGH TICK…THAT THEY ARE NOW AN IMMEDIATE SHORT.
Here are some very relevant histories…
As I’ve written before, I consider Crude Oil to be the single most important, and globally pervasive commodity we trade…Like all commodities, it is constantly swinging in both directions, and also, like ALL commodities, it periodically experiences major booms…and MAJOR busts in how it is priced…
In fact, prior to the recent 18 month, 75% crash from $107 to $27 a barrel, there have been three MAJOR percentage declines in Crude since Futures started trading in 1983, total collapses really…AND EVERY ONE OF THOSE CRASHES…AND RECOVERIES…HAD A PROFOUND IMPACT ON THE TREASURY BOND MARKET.
The charts speak should speak for themselves…absolutely arguing: When Oil goes down, Bonds go up…When Oil goes up, Bonds go down.
Believe me, the relationship and correlation between these two markets is NOT coincidental…
And while this newsletter is primarily addressing the Treasury market, I would add that in ALL three Oil Market Collapses shown here, when Crude was on its lows, public and media opinion was just as absurdly, TOTALLY, AFTER-THE-FACT-BEARISH as is currently the case…and I cannot emphasize this AFTER THE FACT point enough…I mean, really, 18 months ago, basically NONE of the analysts or brokerage houses even dreamed a bear market in oil was coming, and NOW they are all predicting ludicrously lower prices as determined by their supposedly professional “research”??? …And prior to that, let’s definitely not forget those same nitwits all crowing about “Peak Oil” (that we had reached the “peak” of world oil supplies) back in 2008 with Crude at $150 and their calls for $5.00 gasoline…forever…Give me a break…If you want to buy into all the NOW bearish “analysis”, go right ahead…As I said last week, if you want to assume you’re going to make the “perfect” buy in Crude at some lower level…Have at it…But for my money, I want to own it now…And together with it, I want to be short the Treasury Bonds.
But…getting back to the Bonds…Here is what the current Treasury Bond and Crude Oil markets have been doing for those past 18 months…and what they look like right now…
Again, I DO think it speaks volumes that the Bonds actually made their high last February…and in spite of several new lows in Oil…and the recent 15-20% crack in Stocks…have really not even come close to challenging that old high…In other words, if Treasuries could “go” when those two very directly correlated markets are getting killed, what IS going to be the impetus to push them higher…and MUCH more importantly, what happens to Bonds when Crude Oil (and Stocks) start going back up? And for my money, that means RIGHT NOW.
I recommend immediately buying puts and/or selling futures in Treasuries…My target is in the mid to low 140’s…before we get to Summer.
Here are charts of every Treasury futures top since 1981
One thing Treasury Bond Tops will do is just WEAR OUT anybody who tries to short them…They start down, and then come back, over and over and over…And finally, just for good measure, they often make one last punch into new highs….and run all the shorts out again…(which I think may have JUST happened) and THEN follow by going straight down…And from my own experience, I can tell you the sell off is usually much bigger than you ever expect it to be…But this IS a big market…with big players…and 15-20 point moves ($15,000-$20,000 per futures contract) are the very much the norm.
Treasury tops often take time to form…but once they DO start down, it is often with a “vengeance”…which I think you will find to be quite obvious on many, if not all, of the charts that follow.
On all of these charts, every 1 point move = $1000 per futures contract
Okay…So there you have pretty much EVERY top in Treasury Bonds for the past 33 years…As I have sometimes noted, when I am doing the research for these newsletters, I often am surprised by what I discover…and even though I have been closer to the Bond market than any other for the past 35 years, this little project opened my eyes in a many ways…I have long known, for example, that the relationship between Crude and Bonds existed but I had not really looked at it closely for quite some time…and was frankly amazed at how “tight” the relationship continues to be…AND, I would say, all things considered, how conclusively I believe their respective EXTREMES now argue for Shorting one and Buying the other…
Beyond that, the exercise of having to revisit the entire bond market for the past 35 years, month by month, to sort out the bullish and bearish phases…and then to identify, inspect, describe and create the charts of all the tops…absolutely constituted an intense refresher course as to how this big, big market actually does trade…AND HOW ITS TOPS DO DEVELOP AND UNRAVEL (precipitously!).
The bottom line is that all of this work firmly solidified my conviction that I am staring at what I believe is a VERY big trade. Bonds DO go down in 20 point clips. They DO trade opposite Crude Oil. And they do get going…QUICKLY…and once they start, they DO often just KEEP on going.
I have more that I would like to add, but frankly, I am out of gas…
Some quick notes and I’ll close this out…
Today’s market is very similar to the 1985-86 market following the FIRST crude oil collapse?
I meant to address the fact that the demand for long term money…particularly on the commercial industrial side…is CRANKING UP. Major construction projects are beginning to appear everywhere I look…and those projects are ALL done with borrowed money…And simply stated, when entrepreneurs and corporations are walking into banks and ASKING to borrow money, RATES GO UP…In other words, when you are a banker and you have 10 guys asking to borrow when you can only lend to 8 of them, you DON’T start offering them lower rates…You sit back and say, “Well, we can help you but we’ve got to ask for a slightly higher rate”. And THAT is a basic portrayal of how the whole “rates going up” thing actually works in the real world. Sounds over simplified…but it IS the way it happens.
DEMAND FOR BORROWED LONG TERM MONEY IS ACCELERATING…HIGHER LONG TERM INTEREST RATES WILL BE THE RESULT.
On another very quick note…Corporate Commercial Paper and Corporate Bonds are coming out of the woodwork everywhere…which means MOUNTAINS of new SUPPLY..which also, is absolutely NOT bullish for the bond market…
And finally, here is the big picture…One more perspective that just gets me more bearish every time I look at it…Buy Low? SELL HIGH?...Well, here’s your opportunity.
Added fact…There is all this rhetoric out there that the decline in Oil is signaling a slowing world economy…that weak oil is a bad sign for what’s coming…Well, that SAME argument was being touted by the yakheads at the end of every one of the previous three Crude Oil Crashes…and guess what? A year after the April, 1986 low in Crude, the Dow was up 37%...A year after the December, 1998 Crude low, the Dow was up 24%...and a year after the December, 2008 low, the Dow was up 23%...Yes, if you are in the oil business, the 70% drop in prices is a big stinger…But for the rest of the economy? The fact that every business out there has seen their energy costs SLASHED by 70% is MAJOR…and the same goes for consumers…For sure, there are jobs being lost in the oil patches, and yes, there are some banks with bad energy loans on their books…but their problems are NOTHING compared to the boost EVERYBODY and EVERY BUSINESS out there is getting…I HAVE YET TO SEE OIL PRICE DECLINES BE ANYTHING BUT AN IMMENSE POSITIVE FOR ECONOMIC PROSPERITY…BOTH HERE IN THE USA AND EVERYWHERE ELSE ON THE PLANET.
I am more comfortable trading Bonds than any other market...There are a number of ways to take a position here using options or futures with options...As it's late and I'm tired, for the moment here is one way to go...
Whew…That was a lot of work…Hope you can see what I see…and do something with it...Not that it has to happen this time but this IS the market that I have had more big hits in than any other…In other words, this could be a money loser but I am more than willing to take the risk as I REALLY THINK THIS HAS BIG POTENTIAL.
This is the bond market guys. Many of you have been here with me…in this market…before. Get ON it. I may be dead, dead wrong but my opinion (and perhaps my expertise) does not get any stronger…or better I think…than this. Pick up the phone.
All recommendations in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Treasury Bonds