February 16, 2010
The past few weeks have seen retracements against me in all of the markets in which most of you are positioned, and any time you are in a position that starts going the “wrong” way, it is only natural to get that “oh no!” feeling… but I do see this recent action as nothing more than a “pause” before we ultimately see Soybeans, Soybean Oil, Gold and Silver trading at sharply lower levels. On the flip side, I see the upward swing in the Dollar continuing steadily higher and I still look for Treasury Bonds to trade explosively higher.
Here are brief updates in each of those market areas, with the bottom line being, all of my lately expressed opinions remain just as strongly the same:
Let’s start with this…
I look for Treasury Bonds to trade tremendously higher as long term interest rates fall throughout 2010. I fully expect to see Bond in the 130’s by early next fall, or approximately 15 points ($15,000 per futures contract) above current levels.
The truth is, after hanging with the Soybean Oil idea for over a year now, as I am not some sort of psychological Superman, and as I am susceptible to getting worn down, buying Treasuries is the idea in which I am currently the most comfortable putting new money on the table. All of the economists, analysts and talking heads can keep bleating the same conventional UNANIMOUS “wisdom” that “Rates gotta go higher” (and Bonds lower) as loudly as they want from now to the next new year, but I think they are ALL, as is their general norm, just dead ass wrong.
With short term rates at virtually zero, and according to various Fed comments, staying there for an “extended period”, I think it only a matter of time before we see the 30 Year Treasury, currently yielding 4.63% (see chart below), make some sort of dynamic move lower (meaning higher bond prices) to close this historically enormous 4 ½ % gap between long and short term interest rates…You’ll note on the following chart that last year we hit a low of 2.5%, which I’d suppose may be the low in long term rates for the foreseeable future, but I also believe we will minimally see yields, at least once, go back to the 3% mark.
It is a fact that TRILLIONS of dollars worth of bonds are changing hands globally every day…Bonds are as much a part of the world as automobiles or airplanes (and have been around for many centuries longer), and within the international financial community, United States Treasuries are still considered to be absolutely the safest piece of long term paper on the planet. The pundits can scream, “Nobody will buy our bonds”, over and over and over, but another fact is, EVERY auction of US debt, HOWEVER much the government is selling, is instantly, TOTALLY soaked up by the marketplace.
One favorite “reason” I’ve seen, ad nauseum, for bonds to go down (and rates go higher) is the ridiculous idea, “ China might start selling their US bonds!”… Yes, China has invested vast sums of money in US Treasuries (they are second to Japan) but so has the rest of the world…and even more so has the American public…Aside from the simple concept that most investors, whether they be institutions, government or individuals, buy long term debt instruments (bonds) to HOLD them to maturity, not trade them six weeks later, I’ll just refute this supposedly intelligent fear of potential Chinese bond dumping with the following excerpt from last Friday’s London Daily Telegraph: “China has ordered managers of its vast currency reserves to withdraw from risky dollar assets and retreat to core debt guaranteed by the US government… A Communist Party directive leaked to the Chinese-language edition of the Asia Times said dollar reserves should be limited to US Treasuries or agency mortgage debt such as Freddie Mac that enjoys Washington's implicit backing.” No, that’s not “I pledge allegiance to US Bonds” but it sure as hell sounds like an implicit understanding, from the Chinese authorities that US debt IS the last bastion of long term international debt security.
Aside from that, you have the American public and American institutions who own, I believe, at least 2/3 of all the outstanding US Treasury Debt. Are they going to quit buying? Are they going to dump their bonds? Are the baby boomers whose retirement account buying drove the equities markets skyrocketing higher during the 90’s going to now step up their investing in the stock market? Or are they going to be more inclined towards something like bonds, where they know what they are going to earn…and they know they get all of their money back 15 or 20 or 30 years from now?
Folks, there are literally worlds of Bond buyers out there…and I say, other than issuers, like the US Government, THERE ARE NO REAL SELLERS. This IS a “buy and hold” market.
Inflation? I say “hogwash”. I fully recognize that inflation is the primary enemy of the bond market, and maybe we’ll see it someday in some other distant economic cycle, but not in this current one…For MANY reasons, which I’m going to leave for another newsletter, I think this hyped up fear of inflation is just as absurd as the fear of China dumping their US Treasuries…I still firmly believe DEFLATION is much more of a possibility than inflation…
OK, that’s enough of my warped fundamental longwinded analysis…I’ll just leave it with this…I know all of you have been “paralyzed” by the Soybean Oil trade, but some of you have still managed to venture into short Gold or Silver, and some of you are also long the US Dollar Index…but I really only have one individual who has this position in bonds, and he, bless him, is just riding on a misguided faith in Bill’s “proven” expertise in the bond market going back many years…This is ALWAYS a trade I hate, because, in spite of the average extremely attractive potential of what I would call a typical bond move (10-15K per contract), nobody ever wants to do this…This is always an impossible sale for me…Guys, I think bonds are BIG…Call every broker you know. Check every opinion you can find…And when you have heard 99% of those voices so smoothly, logically articulate that the idea of a BULL MARKET in BONDS is a loser, think about all the times you’ve seen all this industry’s “professionals” be so damn wrong, so, so, so many times…No, I’m no guru myself, but I have seen this trade in this market so many times during the past 30 years that it really does feel like déjà vu…And no, this still doesn’t mean I’ll be right…but I tell you…This, to me, is the same old beautiful bullish bond trade and if you do have the bucks, you really ought to call me up and get on it.
I’ll try to keep the rest of this thing limited to charts and option possibilities…
The next chart used to be my favorite option play in Bonds…Going about 4 points out of the money for the leverage…Now in my old age, I’m more inclined to pay up and buy options that are closer in, like the 118 calls shown above…But, hey if you want the leverage, here’s what it would look like…Not that it will happen again, but I’m sitting here (while my baby boy Kevin pounds “Dark Side of the Moon” out of his surround sound…We lovingly share my office) remembering 1998 when you guys, or some of you, were part of a collective million dollar trading profits month using out of the money’s in Treasuries…
Here’s another possibility…Adding three months of time and going out to September…
I continue to see Soybean Oil in the mid to low 20’s
And here’s my nemesis again…As discouraging as this has been, I do keep reminding myself that the spring is just getting coiled tighter and tighter…and when this goes, it should be really big. I do confess that the 3 cent upswing during the past two weeks has got me feeling like, “Oh no…not again…”. Nevertheless, these ARE incredible numbers for the 2 and 1 at $3222 a “unit” with almost 5 months of time…The whole point of the 2 and 1 is, I believe, it does allow you to put a real wad on the table and have an excellent possibility of getting it all back, or, making a real hit…The numbers below are now contrived or out of the question…This IS big leverage.
And here are those Precious Metals…Easily the most hyped up story on the board now…Who could possibly be left to buy into this idea? My guess is anybody who’d ever go for this MUST have already done so…Oftentimes, trading is simply a game of “Who’s the last fool?”. Maybe I’m the dumb one here but I think the Metals thing is just OVER and anybody who wants to own Gold and Silver is in for years of no fun at all…
And here’s the US Dollar Index…Do you still remember how the biggest, surest no brainer on the planet last year (as professed by virtually “expert” there is) was to Short the Dollar...and has continued to be that the Dollar is “trash”? If you do remember, take that information and compare it to what every guy with a suit and a pencil in New York is saying about Bonds and interest rates today….
That’s it…Give me a call if you’re interested…I think there are some strong trades here…