February 4, 2017
After Wednesday’s Fed announcement was widely perceived by all the genius brokerage house “strategists” as being on the dovish side, not signaling any immediate rate moves, the analytic world has gone back to sleep with the idea that rates won’t be moving imminently…and that all you need to do is wait for the Fed to TELL you exactly when they will be acting…
HOWEVER...as stated here many times, THE WAY THIS GAME REALLY WORKS IS…INTEREST RATES WILL FIRST MOVE UP IN THE MARKETPLACE…AND THEN THE FED WILL MAKE IT OFFICIAL…THEN THE FED WILL RAISE THEIR “TARGET RATE.”, which, again, is something all then NY guys just still don’t seem to understand.
The chart following should make this perfectly clear…
And just to oversimplify what you see here...again…THE MARKET MOVED RATES HIGHER…AND THEN THE FED MADE IT “OFFICIAL”…And taking it a step further, DO note that even though the Fed still has not moved since December 14th, rates are STILL continuing higher…
The Stock Market and the Economy…
and their Relationship to Interest Rates
As we KNOW, virtually NO ONE on Wall Street was anticipating the surge in stocks since the election…QUITE the contrary really…and only recently have some of them been bludgeoned (by the market strength) into recognizing we ARE in a bull move…BUT…just a quick sampling of daily headlines will show you that every two minutes you can STILL find another nitwit yakhead talking about a “potential correction”, or that “Trump’s tweets, phone calls and executive orders are going to derail the world economy”, or that “earnings and PE’s don’t justify current price levels”, etc…and other wrong-way analyst nonsense…their bottom line still being, “We like it (finally)…But don’t buy it here.”
Just a sampling from the past week…
I CONTINUE TO SEE THE STOCK MARKET IN BLAST OFF MODE…JUST BECAUSE WE HAVE PAUSED SINCE MID-DECEMBER DOES NOT MEAN THE MARKET IS STOPPING…AND I STILL SAY ANY GIVEN DAY CAN POP FOR 400-500 POINTS ON THE DOW…AND THEN BE DOING MORE OF THE SAME IN THE DAYS THAT FOLLOW…
And if I am right about that…IT WILL LIKELY MEAN THAT EURODOLLARS, WHICH HAVE BEEN MOVING DEAD OPPOSITE THE STOCK MARKET, WILL BE GOING DOWN FASTER…AND FURTHER…THAN ANYONE IN NYC IS EVEN CLOSE TO EXPECTING.
At some point…SOON I think…we are going to have an absolutely MONSTER week in stocks…and at the same time, we will be seeing the Eurodollar market get CRUSHED…And in my experience, going all the way back to August, 1982, when this bull market really got started, is that there is NEVER any specific news item or event that spurs, or explains, one of these lift offs in stocks…nor will you EVER get even the smallest contingent of Wall Street hacks telling you, “Buy this NOW! The big one is dead in front of us.” Nope. Not at all. The BIG moves just start…literally from one blind day to the next…and then it’s off to the races as all the money that is “out” HAS to start chasing…and buying…the market at any price…resulting in things getting really crazy on the upside…But then again, it’s not crazy. IT’S JUST THE WAY THIS MOB PSYCHOLOGY GAME OF “VALUING” PIECES OF PAPER ACTUALLY WORKS.
As noted several weeks ago, I will remind you that pension funds (BIG MONEY) have been selling stocks since mid 2014...and now have more cash as a percentage of assets than they have had at any time since 2004...And those sidelined funds represent a TON of buying potential, being run by a herd of fund managers who are still either out of the market, or "light", and you'd better believe they are now VERY nervous watching the market push into new historical highs. In plain English: Their jobs are on the line if the market goes up without them...and all the money they manage represents nothing but jet fuel for a market that is ALREADY seriously on the move..
While not a perfect indicator, it is also important to remember that the Stock Market IS a barometer of FUTURE economic activity…And with the recent, and ongoing, strength in stocks, I think the odds of seeing some HOT economic numbers in the months ahead are extremely high…and if this does become the case, I see the result being nothing but an acceleration on the upside in rates…and therefore, an acceleration on the downside in Eurodollar futures.
The fact is, we are starting 2017 with a already rapidly expanding economy…with one piece of evidence this week being that the Atlanta Fed’s “GDP Now” model moved its anticipated 1st Quarter GDP from 2.3% to 3.4% growth…which is NOT a small number…And while we might see Trump ease off on some social aspects of his campaign promises, one thing we are NOT going to see is his whole “Build Everything in Sight Program” be compromised in ANY way…No, the details aren’t yet known, but I have zero doubt that Trump and Congress ARE going to be ramping up the economy in a fashion beyond anything any of us have personally ever seen…And I reiterate, they will be throwing all this stimulus at an economy that is anything BUT weak…Really…Think about it. What industry can you name that is NOT on the upswing? And do you think ANY of them are going to be CUTTING BACK in the coming year? Guys…I repeat…The economy is going to get HOT…and slowly moving rates up a measly percent or so is NOT going to slow ANYTHING down…
I MIGHT BE DEAD WRONG, BUT I AM CONVINCED THAT RATES ARE GOING UP FASTER AND HIGHER THAN ANY OF THE FOREVER WRONG BROKERAGE HOUSE GUYS WOULD HAVE YOU BELIEVE…
MY CURRENT FOCUS IS STILL ON THE SEPTEMBER EURODOLLAR PUTS…WHICH, I STILL SEE AS UNBELIEVABLY CHEAP…EVEN MORE SO THAN A FEW WEEKS AGO.
The bottom line is…If the perception about how fast rates are going up changes AT ALL, this contract will probably VERY QUICKLY be trading down at 98.25 and lower…All it takes, really, is maybe one strong economic report…OR…the Stock Market doing what I think it’s about to do.
And finally, when do you EVER see the markets do what the Wall Street boys are telling you they will do….?
I WILL TAKE THIS BET ALL DAY…IF IT FLATLINES…IF THIS CHART IS STILL SITTING THERE ABOVE 9850 EIGHT MONTHS FROM NOW…THIS OPTION WILL BE WORTHLESS…BUT AGAIN, I WILL TAKE THIS BET…ALL DAY.
Give me a call if you have the risk capital, and think my perspective makes sense…
STILL BUYING PUTS…either as new positions or as additions to existing ones…
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: Eurodollars