This is not a knock on them, at all, but the Fed DOESN’T predict the economic future any better than anyone else…In the final analysis, the are just a bunch of bankers and economists who can totally miss what is coming just as badly as the worst forecaster there is…As examples, they called for an end to the Dot Com bull market 8-10 years before it ended, and then didn’t see that crash coming when it finally did hit in 2000…Nor did they see the 2008 mortgage market crash coming…AND the ensuing Great Recession…and even then, long after the economy was in a shambles and the Dow had dropped by 50%, they still had NO idea they would be eventually need to be taking rates down to nothing…My point is, the Fed does not constitute some Monetary Wizard of Oz that KNOWS what is going to happen, nor do they always KNOW exactly what to do when there is a need for action…In a word: They REACT to what comes down the pipe…and hope, no differently than everyone else, that the actions they take will work…
And to relate this to the present? Just because today’s Fed is suggesting a gradual rise in rates is what they are expecting, does NOT mean that is the way it will happen…and even the Fed governors themselves will admit the same.
Right now, the investment community’s perception…reflected in Eurodollar market prices…is that the Fed is on an extremely slow, Plain Jane, rate raising course that will creep along at some predetermined pace for the next few years…to the extent that the market STILL has only built in about a 1/4% increase in rates between now and September…which I continue to think is just nuts…as well as a classic example of how mob psychology behavior can result in markets becoming totally out of touch with reality…which, ALSO, is what DOES create opportunities as a trader.
The bottom line is I believe that either a truly SCREAMING stock market, and/or immediately incoming ECONOMIC DATA, will SOON have the Fed scrambling to move more aggressively…meaning they will be raising rates MUCH, MUCH earlier and faster than even they, or the markets, are currently anticipating.
Sideways action is normal in the markets…
And sideways does NOT necessarily mean that a move has ended…
But that is precisely what all the wrong-way analysts would have you believe about the Stock Market.
Since mid-December, Stocks and the Eurodollar market have essentially been consolidating…But I absolutely believe this sideways action in both arenas is ending NOW…literally…and that today’s new highs in Stocks are just the beginning of a MONSTER upswing…and with the fact these two markets have been moving dead opposite each other…I believe the lift off in Stocks will be an IMMEDIATE trigger to send the Eurodollars into another sharp move lower.
Just to remind you…From my Feb 4th newsletter, here is repeat view of their inverse relationship…
I would also point out that while there are periods in any major trend when markets are moving relatively straight up or down, they also often spend a great deal of time going sideways, or even “retracing” a bit in the opposite direction (which, in my opinion, has been exactly the case in the Dow and Eurodollars for the past 6-7 weeks)…And this sideways action is typically accompanied by plenty of news and “logical” talking head opinion that suggests the move is over…BUT…instead of truly stopping (and having all the nitwits be right) the next thing you know, the trend has resumed, maybe with a vengeance, and all the yakkity yaks are left there just watching it happen…again…as it ALWAYS seems to be.
Here is a real world historical example of what I’m describing, specifically using the September, 2006 Eurodollar contract…and how it “behaved”…during the last rising interest rate cycle we went through back in 2005-2006…I have also added the current September, 2017 contract for comparison…And you can BET that on each of these consolidations (noted in blue), there were PLENTY of analysts wrongly arguing that Eurodollars had become a “Buy.”
OK…So here’s the Dow Jones as of today…Up 118…and closing into new all time highs…And as I have been saying, there is an ARMY of supposedly “professional” fund managers who have followed the crowd (bought into the FEAR story), and therefore have been SELLING stocks for a long time now, and are now basically “light” and still on the sidelines…and watching new highs while wondering, “What do I do now?” Guys, I reiterate…They represent a TIDAL WAVE OF BUYING…and ALL OF THOSE GUYS WILL BECOME BUYERS…AT HIGHER AND HIGHER PRICES…or they will be out of their jobs when their next performance reckoning takes place.
Here’s a Eurodollar close up…
And here is the longer term shot of this contract…
I note that while this last consolidation has been going on, I have watched put options prices just become what I think are RIDICULOUSLY priced…just dirt, dirt cheap…And most significantly, with September at 98.65, the reality is that this market “thinks” we will basically only have ONE 1/4% increase in rates between now and September…With what I think Stocks are doing (and saying about the future)…and my belief that the economy is definitively shifting into high gear…AND all the stimulus Trump wants to…and WILL…provide, I THINK WE COULD EASILY BE 3/4 TO A FULL PERCENT HIGHER IN RATES BY THE TIME THIS SEPTEMBER CONTRACT EXPIRES.
And yes, we paid 7.5 to 8.0 ticks (almost double today’s price) three weeks ago when Sept Eurodollars were just 6 ticks lower than they are today…which is just AMAZING…and I think reflects the investing crowd’s total lack of belief that this contract will trend lower…almost AT ALL…during the next 220 days…INCREDIBLE…and INCREDIBLE LEVERAGE I THINK.
One thing I’ve seen over and over in this business is you NEVER know when markets are about to “adjust”, when markets are about to…seemingly out of nowhere…start shifting perceptions AND therefore prices or values on all these PIECES OF PAPER we trade…With this in mind, I will offer that I think it is entirely possible the Fed could raise rates as soon as their March 14-15 meeting (or EASILY by April) and if this were to occur, with the markets currently not expecting a move until June, I’m pretty sure it would mean an immediate CRASH in all the Eurodollar market contracts.
And what do you think these four markets signaling?
Lumber, Copper, Cotton and Energy are the four primary industrial commodities we trade (Cotton is a crossover)…and strength or weakness in them, especially if it is in ALL of them, can be highly indicative of which way the economy is pointing…AND I THINK ALL FOUR OF THEM LOOK LIKE THEY ARE ALREADY MOVING SOLIDLY, IF NOT DYNAMICALLY, HIGHER…which I cannot only interpret as suggesting STRENGTH IN THE ECONOMY…AND INFLATION…WITH BOTH OF THOSE FACTORS BEING JUST TWO MORE REASONS TO EXPECT SUBSTANTIALLY HIGHER INTEREST RATES.
See for yourself…Decide for yourself (and NOT what all the painted faced yakheads would have you believe).
And for you farmers, I am pretty sure that VERY few of you still own any Cotton from last year’s harvest…and you MUST know what that means…Some of you I’ve talked to know that I think 90-95 cents is an easy objective…by JULY.
The Stock Market IS a barometer of future economic activity…When it is screaming, it DOES spur confidence, and expansion, and spending…and maybe some inflation…And I think the LAST thing the Stock Market is now signaling is a “slowdown” (FAR from it), and especially when there are still SO many supposed “pro’s” who don’t believe what they are seeing…
All things considered, I think the idea that we are just going to have some “Ho-Hum”, zero fireworks sort of Stock, Commodity and Interest Rate markets for the rest of this year is ludicrous….I think we are going to see big moves across the board…and the last thing I think we are going to see is “low” or “gradually increasing rates”. I HONESTLY CANNOT COUNT THE TIMES I HAVE SEEN THE FED MISREAD WHAT IS HAPPENING…AND THEN WATCHED THEM PLAY “CATCH UP”, BY WHICH I MEAN, MOVING MUCH FASTER AND BIGGER THAN ANYONE…OR THE MARKETS…WERE EXPECTING. And one more time, I am not “bashing” the Fed. I think they have an impossible job…that everyone expects them to perform perfectly…which, quite honestly, not EVER going to happen.
Buy Stocks. SELL EURODOLLARS.
I may be dead, dead wrong, but I say these put options ARE CRAZY UNDERVALUED...SO YES, PICK UP SOME MORE...WHILE THEY ARE STILL CHEAP.
Pick up the phone and tell me that I am wrong?
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