February 8, 2019
This piece is way too long but the trade I’m recommending is so totally contrary to the Wall Street and media current “groupthink” that there was no other way to make my point…I salute and thank you if you manage to wade through the whole thing…At any rate, if it’s too much information, do at least be sure to get a look at the last chart.
And if you think my work is worthwhile, please do pass it along to anyone who might be interested. This newsletter is my primary sales tool and I always appreciate any help I can get.
What I see for the next year:
The Economy is NOT slowing…
Not here, NOT in China, NOT in Europe…
In fact, I say they all will be accelerating.
Stocks will make new highs this year.
INTEREST RATES ARE STILL GOING HIGHER.
It is time, again, to be Short Treasury Bonds and Eurodollars.
Make no mistake. Interest Rates have been rising since mid-2016, and all they have done recently, due to the usual Wall Street inspired FEARS about a failing stock market and a slowing economy, is PAUSE in their march higher…which, I believe, has created another outstanding opportunity to be short Eurodollars…or to bet that Short Term Interest Rates will continue to go higher.
To be clear: I think the economy is still LEAPING forward…in SPITE of the uncertainties stemming from the trade war and other issues…The truth is, through this newsletter, I have been resolutely bullish the Stock Market, with a few, very brief, several month exceptions, since August, 2010…And I am STILL bullish and see all of the volatility of late as nothing more than the market’s way of again convincing the analytic masses (whom, however they try to spin it, have basically been bearish/cautious since 2009) that expectations for the future should once again be lowered…that is, convinced them once again to revert to their decade long advice to “be cautious,” or “own defensive stocks”, which otherwise stated, is Wall Street’s way of saying, “ Don’t buy it here.” Don’t believe me? Check out just a few headlines that represent Wall Street’s outlook from just the past few weeks…
I mean, really, for YEARS I’ve been showing you these negative headline collections in my newsletters, as well as annually documenting how dead-wrong Wall Street’s so called “strategists” have perennially been…So, when day after day, I hear all these geniuses saying, “Don’t buy it here!”, it only reinforces my fundamental perceptions that you are still supposed to be long the stock market…
For one, as I have written for several decades, two major forces are driving the world economy higher...1. The STILL exponentially expanding Technology Revolution...with its 1000’s of never before imagined products and MULTITUDES OF ENTIRELY NEW INDUSTRIES….And 2. The victory of Capitalism over Communism in the early 1990's. Yes, Communist governments still exist, but during the past 20-25 years (basically since the Berlin Wall came down) ALL of those regimes have become fully committed to promoting capitalistic enterprise among their citizens…And with this global transformation, those SEVERAL BILLION NEW CAPITALISTS AND CONSUMERS that have therefore been created in Asia, and from behind the former Iron Curtain, have represented a massive economic stimulus to the planet…and continue to do so…to the extent that the planet is experiencing a never-before-in-existence dynamic that NO economic textbook can even BEGIN to account for. For sure, there will be bumps along the way, but basically I think the ever upward sloping Dow Jones chart below will keep doing what it has been doing for the past century…which is MOVING STEADILY HIGHER (while analysts and economists keep predicting the next recession/stock market collapse).
Think about it…2018 was pretty much a year of ongoing bad news, antagonism and turmoil from start to finish…and the Stock Market and the economy are still fully “intact.” So…WHAT WILL THE MARKET DO WHEN THE NEWS GETS BETTER? As I think unquestionably will be the case in 2019…
I honestly see 28,000-29,000 as a definite possibility by year’s end.
And as for this now EXTREMELY popular Wall Street idea that China is slowing…and going to take the world economy down with it? I say BULL! China is NOT in trouble, and NOT slowing, and NOT going to drag down the rest of the planet. The truth is, their growth has been “slowing” since 2010 when their Annual GDP Growth Rate was 12%...to a now, still strong, 6.6%...which, by no measure I can imagine, would be called a “weak” number. However, my observation has been that the average analyst has been negative on China for the ENTIRETY of those past 10 years, repeatedly citing financial excesses, too much debt, overbuilding, etc., and endlessly calling for their economic demise…But let’s get real…Despite all those doubts, China has continued to grow tremendously, in outrageous percentages really, as they emerged as a major economic player on the global scene during the past few decades, so it was only natural that they would have to see some degree of a “slowing” at some point…I mean, really, who in their right mind could expect them to continue growing forever in double digit percentages? For sure, China, like EVERY country on earth, has issues they have to deal with…There will always be “problems” or excesses that analysts, “strategists” and economists can point to and fret over…BUT…they are NOT going down the tubes…
As I think can be seen here…
And as for here in the States…
Aside from the fact our economy is already firing on all cylinders…
INFRASTRUCTURE IS BACK AS A CONGRESSIONAL THEME…
FROM BOTH SIDES OF THE AISLE.
And you are going to be hearing more and more about it as the year goes on…
After Trump was elected, one of his stated “bigtime” objectives, together with the Republican majority, was to do an all-out rebuild of the USA’s infrastructure…”including tunnels, bridges, roads, buildings, inner cities, etc.” However, due to various distractions (tariffs, the wall, alienating virtually EVERY ally we have, cancelling treaties, his ties to Russia, etc.) the rebuild has yet to get even the smallest start in Congress…BUT, I believe that is about to change…in a BIG bipartisan way…To wit: I found it stunning that following the Democrat’s having taken control of the House of Representatives last fall, that very night, Nancy Pelosi emphasized the Democratic party’s intent to “raise worker’s wages with strong economic growth in rebuilding the infrastructure of America” and “deliver a transformational investment in America’s infrastructure to create good paying jobs, rebuilding our roads, bridges, water systems, broadband networks, schools, housing and beyond.”
So…Although we still have two parties with different ideologies, we also now have BOTH of those parties, I think, ready to do something that all our legislators love doing…and that is, SPEND MONEY ON PROJECTS THAT THEY CAN TAKE BACK HOME TO THEIR CONSTITUENTS. Therefore, I would expect to see…fairly soon…the whole “Let’s rebuild the infrastructure!” subject become an all-hands-on-deck (or in the pot) initiative, promoted by both sides to the extent that they will probably even go overboard in taking funds and building projects back to their home states and districts…And I can ONLY view this as being tremendously stimulating for stocks and the economy…AND…BEARISH FOR THE INTEREST RATE MARKETS.
The Real Reason for this Newsletter:
SHORT TREASURY BONDS
Of late, the forever wrong brokerage house sheep have all jumped on the same band wagon and are now unanimously squawking, “the Fed finally got smart and realized it was a mistake to further tighten interest rates.” Yup, they are all citing the inverted yield curve (which most of them couldn’t have defined 6 months ago), and that sooner or later we’re headed for a slow down or recession, and that with the stock market “weakness”, AND the trade war uncertainty, and Brexit, and a “weak Europe”, and China worries, etc., etc. etc.,…With all these worrisome “reasons”, the Wall Street nitwits have decided there is just NO WAY that the Fed should be holding back on the reins…that the Fed should remain “dovish”…
Well, I’ll say it again. THE UNITED STATES ECONOMY IS STILL IN A MAJOR EXPANSION…DITTO THE WORLD…And that the meager raises we’ve seen in rates have not yet been a factor, at all, in slowing any industry…anywhere...including housing/construction/autos or whatever business you want to name…The fact is, rates are still historically extremely low, and the only reason all the New York know-nothings are on this, “The Fed was wrong” thing, is because of the recent Stock Market swoon…which is OVER…but STILL has all the geniuses thinking that “the economy is fragile” and “It’s the Fed’s fault.”…And I say they are absurdly wrong on both counts…I mean, really, just walk out your door and note that the streets, malls, airports, construction sites, etc. are all jampacked with activity…THE ECONOMY IS STILL SURGING.
And so, together with my observation that we NOT slowing, what are the implications when you then throw in that “rebuilding the infrastructure” IS going to get started by Congress this year? Which WILL create jobs (in an already tight labor market) and the potential for increased inflation? And WILL mean a LOT of borrowing, both from the banks and the US government…with the Washington bet being, as usual, that all the spending will be paid for, not now, but with future growth inspired revenues? And WILL MEAN A TON OF BRAND NEW, AND MASSIVE, CONSTRUCTION ACTIVITY? Do you really think interest rates are just going to lie here going nowhere…still only a few percent above zero?
IN THE LENDING MARKETPLACE, BOTH DOMESTICALLY AND ABROAD, WITH INCREASED LOAN DEMAND FROM BOTH THE PRIVATE SECTOR AND THE US TREASURY…AND HIGHER STOCKS…AND SHARPLY INCREASING ECONOMIC ACTIVITY…THE RESULT WILL BE HIGHER INTEREST RATES.
And as for what the Fed will or won’t be doing?
As I have noted for years, THE FED IS LED BY THE INTEREST RATE MARKETS…NOT the other way around. And same as we saw several years ago when I first started shorting Eurodollars (betting on rises in short term interest rates), I made the point that the Futures market would move AHEAD of the Fed…that is, when rates are going up, the massively liquid FUTURES markets will usually push rates higher…and THEN the Fed follows suit with their periodic announcements of raises, thereby only confirming what has already become a reality in the marketplace…Which IS how it happened from 2016 until now…and how I absolutely think it will continue to happen going forward.
Point blank…I will say that this idea of the Fed just closing their eyes and doing nothing as the economy shifts into an even higher gear is just ludicrous…just more absurd Wall Street bunk…As can be seen on the chart below, Interest Rates have been going up since mid-2016…and recently, concurrent with the “scare” from the stock market, have only PAUSED…And WILL, I believe, now continue higher…minimally for another ¾ to 1 percent during the next 12-18 months.
Meaning, if I am right…Eurodollar Futures, which reflect short term interest rates (and have nothing to do with the Eurocurrency), will be going lower as short term rates (3 month LIBOR) move higher. And here, same, as it was several years ago…is where this gets financially interesting…by which I mean, I see a TON of leverage here.
To start with, the chart below is a side-by-side comparison of the current March, 2019 Eurodollar…and the December, 2019 Eurodollar…contracts going back to 2014…And the most important thing to observe here is that RIGHT NOW, with these two contracts essentially being at exactly the same level, they are reflecting the “perception” that rates won’t be going up AT ALL during balance of 2019 year…In other words, the fact that the December contract is the same as the March means that the market “thinks” that rates will be exactly the same 10 ½ months from now…Which I think is just nuts.
Check out the chart…And remember that Eurodollars go DOWN when interest rates are rising…Also that to determine what interest rate is implied by the futures contract, you simply subtract the futures price level from 100…For example, right now, with the March contract’s close today of 97.37, it is implying an interest rate, on 90 day money, of 2.63% (100-97.37 = 2.63).
Just to make sure it’s quite clear as to why the 75 point rally occurred during the last two months of 2018…
I maintain that, within just the next six months, STRONG economic statistics and a STRONG stock market will have totally disintegrated the idea of falling stock markets and weak economies, and in fact, the media will likely be jammed with talk about the “surprising strength in the economy”, or “incredible 2nd quarter growth”, or even that, “the economy is starting to overheat.” And guys, if this is the case, December 2019 Eurodollar contract will be nowhere close to its current level. IT WILL BE A LOT LOWER.
I MIGHT BE DEAD WRONG, BUT IN MY OPINION, I THINK THIS IS A FANTASTIC BET.
Ask yourself this…Say 6-8 months from now, do you really think we’ll still be talking trade wars, or budget shut downs, or Brexit, or poor, poor China? Or will we be back to how obviously strong the economy still is? Again…LOOK OUT YOUR WINDOW…And beyond that, don’t you think that both political parties will be able to find a common, non-controversial, ground on building the hell out of the economy? Like I said before, don’t you just know that spending money and taking the bacon home to their constituents is attractive to all of them as we gear up for the next election cycle?
The Fed themselves have NOT said, “Rates won’t be going higher.” They don’t profess to be economic gurus, and they, like everybody else, will be monitoring the economy and REACTING when they think it is necessary…But as I keep repeating, the interest rate futures markets have virtually always moved AHEAD of whatever the Fed’s official actions might be…and I have zero reason to think it will be any different going forward…For one thing, due to the fact that the daily trading volume in Eurodollar futures is bigger than ALL of the other futures markets contracts in the world combined, it should be easily understood that this market IS going to be a leading indicator of what is happening in the real financial world…In other words, the trillions of dollars that are “voting” there, daily, ARE going to be far ahead of any group of bankers and economists when it comes to actually predicting the real supply and demand as to what determines the cost of money…otherwise known as interest rates.
SO…ONE MORE TIME…EURODOLLARS WILL MOVE LONG BEFORE THE FED DOES.
Here’s the trade. I may be dead wrong but I think it is an absolute killer…with BIG LEVERAGE and a ton of time.
Give me a call and do something with this. REALLY.
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