February 24, 2012

 I don’t EVER know what is going to happen…

But I do know there is rarely anything happening in the markets that hasn’t happened before…and probably MANY times…So all I am ever really doing is looking for situations, moods, charts, events, even fundamentals (yes!) etc. that resemble similar market “set ups” I have seen during the past 32 years…We all know this is not an exact science, and as I am always tirelessly repeating, the markets (ALL of them) are, I believe, just a giant mob psychology game…and that sometimes it pays to run with the crowd, but more often than not, you’ve got to be willing to do what no one else is willing/trying to do.

There are three trades highlighted here…I think all three have MONSTER potential (or they wouldn’t interest me)…However, as always, I may be dead wrong, and if I am, you will most likely lose however much you invest (and possibly more if you use futures)…

 The trade most people (myself included) are disinclined to take…

For most people, one of the hardest trades to make is going long a market that has just moved into new historical highs. For one, if it’s making new highs, it has obviously been moving for a while, and emotionally, there is always that fear of “buying the top”, where you visualize the money you put on the table begin to evaporate the very next day as the market abruptly reverses…Aside from “knowing” you will lose money, you might also find yourself thinking, “If I didn’t buy it at 80, why am I buying it at 100?”

But the truth is, whether it’s a sideways market, or something you buy deep in the hole (cheap), or if you are picking a top, or whatever…the risk of being wrong on every trade is ALWAYS the same…50-50…You are right, or you are wrong…and to some extent, it really does not matter at what price the market is trading or what It has been doing…

In the end, every trade is simply a question of risk versus reward (standard stuff). Can I afford to take this risk, and is the potential return worth what I might lose if I am wrong? Am I risking 10 to make 2? Or 2 to make 10?

 Buy April Live Cattle – I LOVE the leverage I see…

To me, this is absolutely a “risk 2 to make at least 10”. It is a situation I believe has the potential to go hyperbolic and I therefore have no idea how high this market might actually go (if I am right).

I AM going for leverage here…From a strategic standpoint, my first choice is to be in the April, which will mean owning options with 41 days to expiration…In other words, you will either win, or lose, within the next 41 days (or a few weeks longer if the trade is working and we exercise call options into futures)…I will also be positioning in the June contract, but as the lead contract in the Meats often moves incredibly faster/bigger than the back months , I want to be sure to own the absolute front (April) of the market.

I also believe this is trade is perfect for owning some put options as defense…As you’ll see below, I just don’t think this market is going sideways…that it either is in the process of exploding on the upside…or it’s going to crap out in a big enough way that owning puts for a little “protection” definitely makes sense. 

As I have noted in previous newsletters, I think there is a strong possibility this year’s Cattle may be last year’s Cotton…which broke out into new all time highs and then went absurdly nuts on the upside…So to start with, here again is a look at Cotton last year…And I am NOT saying, “Look what Cotton did. I expect/know that Cattle will do the same”. I AM saying I DO believe the basic set up is the same, and in fact, maybe has even more of an fundamental basis for going just a crazy as did Cotton.

Here is what it looked like on a daily chart…

Obviously, with some of the bone crushing reversals along the way, representing VERY big dollars, I am not saying you just buy a market like this and forget about it…IF cattle do get into this sort of dynamic move, there are some very difficult decisions to make along the way…involving things like, when/whether to take some money off the table, or when/whether to buy some puts to help lock in profits…or just how far DO you tried to ride it.

FACT: The total number of cattle and calves in the U.S. on January 1, 2012, was 90.8 million head. THIS IS THE LOWEST JANUARY CATTLE INVENTORY SINCE 1952...

So here are the Live Cattle charts…and again I feel compelled to say I certainly do not know if Cattle will become like Cotton last year…but it IS the perspective with which I recommend making the trade…and I am NOT buying Cattle looking for just a 5-10 cent move.

I look at this first chart, the long term picture, and wonder if the bullish story (severely low cattle numbers, USA becoming a net beef exporter for the 1^st time in history) isn’t already "in the market"? And I don't know...But I do know Cattle have not even come close to replicating the recent 5-10 year gains made in virtually all of the other major commodity market sectors (metals, energy, ag crops)...I also know every commodity has its own cycle...They don't all "go" at the same time...And I firmly believe the set up is now perfect for this to happen in the cattle complex.

From a psychological perspective, I will offer the following: The bullish supply side cattle story is well known. Cattle numbers have been sharply reduced, primarily due to extreme drought (no water, no pasture to graze) AND high feed costs, like $7-$8 corn, AND high energy/overhead costs, all of which make it tough to generate a profit during the several year process involved in getting a steer to market…So a lot of animals are gone. A lot of producers are out of the business…and you DON’T just snap your fingers and get the herd numbers back up again. It takes YEARS…And everybody knows this…HOWEVER, in spite of these “known” bullish factors (including the US becoming a net beef exporter for the first time in history), there is an opinion I have seen everywhere that goes something like, “I know the numbers are down. But cattle are already high and (this is the big one) consumers just won’t pay these prices…so prices HAVE to go back down some”. There are many variations on this theme, most recently, that “consumers will be spending all their money on $5 gasoline”, or the ever cited and ever worthless (in my opinion), “the market is overbought right now”.

I see analysts and speculators all over the place trying to pick the top in this market…and one my oldest and best (I believe) observations about futures trading is: If you can hear ANYBODY, much less everybody, calling for the “top”, it AIN’T the top.

Believe me, there are people everywhere recommending the short side of cattle, with many saying, “Short it now. Make some good money on the short side. Then get long for the big move up...because the fundamentals ARE very bullish”. That’s the one I love…This stuff is hard enough to get right the first time, so I always have to laugh when I see opinions like, “the market is going to do this….and THEN it’s going to do that”, the idea being, predicting what will happen, one or two moves in advance, is just a piece of cake…So, again, my big point is, there ARE, and have been, a ton of people recommending the short side of cattle…so take a look at the April chart above, and understand this: All those top pickers will NOT be right (they never are), and this market has not yet done a damn thing to run them out of the market...After many months sideways, we have made new highs by just a few cents, and that is NOT anywhere near enough to have shorts running for the exits…The markets are NOT kind…When you lose (as we all have experienced), it’s not just with a slap on the hand. They take your shirt…and socks…and that is exactly what I think will be the case here…All the shorts are STILL in the market, and to me, any given week now could be up 10 cents or some amount that just is totally unimaginable to the average cattle trader…I know this is a distinct possibility, and would almost call it a routine occurrence in the markets…because I have been on the wrong side of it many times myself…Not to go too far in this vein, but cattle very much reminds me of some years ago when the all time high in Copper had been $1.50, and I tried to get on the short side at those levels, and then watched it go to $4.00 in about 8 or 9 months….So again I say…FAR TOO MANY PEOPLE ARE TRYING TO PICK THE TOP IN CATTLE. THEY WON’T BE RIGHT.

Here are a few approaches that make sense to me…

I think it is important to own some of both the April and June contracts…The meats are peculiar, and there are times when one month (often the front) can move DRAMATICALLY more than the others…So the ideal, I recommend, is at least a small position in the April (which is cheaper) and something in the June as well…

One more note on this Cattle idea and the whole idea of buying a market making new highs…Whatever you think of his politics, George Soros is one of the greatest traders of all time…Somewhere during the last year or so, when Gold had already been going up for years, and still had a long way to go on the upside (and I was STILL wrongly bearish and calling Gold nothing but a “bubble”), I watched an interview with him after it had become known he was buying the gold market…I will never forget one of his comments, which instantly surprised me, but immediately thereafter I realized the simplicity and intelligence of his reasoning. He said, “When I see a bubble…I buy it”. Without dissecting every aspect of the statement, I’ll just say it does allude to the tendency of the final stage in bull markets to be the biggest and craziest part of the move.

Cattle are still pointed north. They have so far only done so quietly. As a result, I believe Call Options are relatively dirt cheap for what COULD happen here. PUT SOME MONEY ON THIS TRADE.

 Still Short Treasury Bonds

A 15-20 point, 6-10 week decline would not surprise me at all.

These are things I think  I “know” about the Treasury Bond market…

They move up and down in fairly violent swings (Wall Street likes this).

EVERY “flight to quality” or “safe haven rally” I have seen was followed by a sharp selloff…and when the move down begins, it tends to be relentless.

If you buy a 30 Year Treasury here, yielding 3%, unless you are totally committed to holding it for 30 Years, I think you are almost CERTAIN to be selling that bond at a loss. If Treasuries come off 10 points before you unload, which is NOTHING in the bond market, you will have lost roughly 7% of your capital…or TWO YEARS of interest.

I maintain that 2% 10 Year Treasury Notes, or 3% 30 Year Treasury Bonds are NOT an investment. The most modest inflation, and taxes on interest earned, will eat up every penny (and more) of that 2 or 3 percent being earned…At these levels, any money “invested” in these instruments is there because it has to be, or it is TEMPORARILY parked for safety…or it’s stupid.

Contrary to what I have repeatedly seen stated in the media, the Fed’s last statement did NOT guarantee they would be keeping rates low until 2014. Here is exactly what they said: “In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 0.25% and currently anticipates that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

That “are likely” makes for a BIG difference…It does NOT guarantee rates are going to stay low...I assure you, if six months from now the Dow is into new all time highs (only about 1100 points away), and the jobless rate is still TRENDING lower (as it is now), and job growth is still trending higher (again, as it is now), and if the European “crisis” is old news (it will be)…If all of these are possibilities are even close to true, then you had better believe the Fed will be saying, “Economy is OK. We need to take rates up from zero percent”, but AS ALWAYS, the Bond market will be WAY out in front of the Fed…In other words, by the time we get a Fed statement indicating they are even THINKING about the inevitable raising of interest rates, the markets will long since have started reflecting this…and my guess is Bonds will be MILES below current levels…One must remember, trading is always about the FUTURE and NOT the present.

 Here is a truly INCREDIBLE picture..

To be honest, with as many charts and graphs as I look at, unless I get the point in one second (if I have to figure out what exactly I am seeing), I am inclined to just glaze over them…and you no doubt are maybe the same…But if you don’t quickly grasp the picture on the following bar graph, I urge you to take the time to figure out what I’m trying to show you…If ever a picture was worth a 1000 words, especially here in the investing world, this one is…Take a good look, especially with an eye on the where money was flowing in the 4^th quarter…and then I’ll add my two cents afterward.

What the general investing public was doing with their money, on a quarter by quarter basis, in 2011…

My observations?

Firstly, on a net basis, THE PUBLIC WAS OVERWHELMINGLY GETTING OUT OF STOCKS AND GETTING INTO BONDS FOR ALMOST THE ENTIRETY OF 2011.

Secondly, with all the SKY-IS-FALLING BS IN EUROPE (mark my words, Europe is NOT going under) and the media in maximum panic mode, DURING THE 4^TH QUARTER, THE PUBLIC WAS STILL EXITING STOCKS AND POURING MONEY INTO EITHER MONEY MARKETS (CASH) OR BOND FUNDS.

Thirdly, during 2011, roughly $166 Billion went into fixed income bond funds. ALMOST 40% OF THOSE BOND FUND BUYERS DID SO IN THE 4^TH QUARTER…RIGHT ON THE ALL TIME HIGHS IN THE TREASURY BOND MARKET.

So what is the significance? Check out this longer term Treasury Bond Futures chart…

Let’s face it…The general public always has been, and always will be, fodder for Wall Street…And I believe that ALL of those bond fund buyers will end up getting raped…Not only that, six to nine months from now I can easily envision the Stock Market (which I am still long and which the public has been essentially been selling all year) being 30-40% higher…meaning the public, once again, in this great big game of fear and greed will have been wrong on both counts.

Finally, I’d also observe, that even with all that 4 quarter inflow of funds, bonds essentially could still only go sideways…not higher…just sideways…Beyond that, as you can also in the chart above, Treasuries do NOT go sideways for very long at all…They should be about ready to go one way or the other…and I absolutely doubt it will be up.

I FIRMLY BELIEVE THE NEXT MOVE IN TREASURIES IS DOWN, AND I THINK IT WILL BE A GIGANTIC MOVE…AT A MINIMUM, BACK TO THE 125 AREA.

Here are several options I believe have major potential...

I always construct these letters in an order that has the final step being the selection of what options make the most sense to me…I write most of the text and create all of the charts as I try to show you exactly how I have arrived at my conclusions…At any rate, as I sat here completing this last stage in bonds (which have been my best opinion, PERIOD, for the entirely of my career), the thought crosses my mind that I KNOW Bonds, between now and some not too distant point in the future, WILL have sold off 25 or 30 points….Yes, I recognize this point in time may easily be more distant than I believe (or I may be DEAD on with my timing which suggests they could start crapping out ANY day now) but I will say, with the usual qualification that I might be dead wrong, IF YOU BUY PUTS NOW…AND COMMIT TO OWNING PUTS UNTIL THIS TREASURIES START CRATERING…I HONESTLY BELIEVE IT WOULD BE VERY DIFFICULT NOT TO MAKE THE SORT OF HIT THAT INVOLVES A VERY HIGH RETURN ON INVESTMENT. That is a very strong statement, perhaps bordering on inflammatory, so I am obligated to add, if I’m wrong you could easily lose everything you invest, but what I just wrote is exactly the way I feel (as, really, is always the case).

This, to me, is a “go to South America” trade…Some of you who have known me a long time will know what I mean…If you don’t , just ask.

Buy the Eurocurrency

The Euro was assumed…is assumed…to be going out of existence.

How much more bearish can it get?

Even so, with the barrage of bad, bad, bad, bad news coming nonstop from Europe throughout ALL of 2011, I will start by simply taking a look at the Euro since it was created in 1998…

Really, think about how loud the noise has been regarding Europe…and consider the fact (in my mind anyway) that 90% of the opinions expressed in the media have absolutely nothing to do with how the markets actually do arrive at values…except maybe to turn investor heads perpetually in the wrong direction…Do they have problems in Europe? Yes. Do we have problems? Yes. Does China have problems? Yes…Is the world economy coming to a halt? Hell NO…For a host of reasons I won’t detail, I’ll just say what I’ve been saying for a while now…that the world is NOT on the precipice…that after a decade of flushing out a LOT of excess…and a decade of massive geopolitical and economic developments (Chinese, Russian and Eastern Europe capitalism for one)…and a decade of further INCREDIBLE, UNCEASING technological advances in how we live our lives (the world over)…and with FINALLY being at the end of two American warfronts…and with interest rates at the lowest levels in generations, I see the world as possibly being on the cusp of what may be a very long, and resolutely robust economic BOOM…As I have written many times: Today’s world is more about business than anything else. China does not want to conquer us. Neither does Russia or anyone else…What everybody wants…EVERYBODY…is to make money, grow their economies…and do some BUSINESS.

As to how all of the above immediately relates to the Euro, I’ll start by saying: IF all the airplay suggesting Europe is falling apart is NOT accurate, the first thing I would think is all the accompanying opinion about the Euro dying is also just a bunch of bunk.

They next thing I’d say is, whenever I get involved with the currencies, I ALWAYS come back to several  quotes by Alan Greenspan regarding currency values, pointing out the statements are coming from a man (love him or hate him, doesn’t matter) at the indisputable top of the economic information chain…a guy who spent years with more computers, more expert staff, more statistical data, more connections, etc., than anyone on this planet could possibly have…and he stated, on several occasions, very clearly, that basically NOBODY ever knows where the currencies are going.  One of the specific quotes is, “Statistics have shown that forecasting exchange rates (currency values) has a success rate no better than forecasting the outcome of a coin toss.”

From another standpoint, he is saying, “When it comes to the currencies, everybody is usually wrong”.

Here is the other quote: “There may be more forecasting of exchange rates (currency values), with less success, than almost any other economic variable….Although measures such as real interest rate differentials, differential rates of productivity gains, and chronic external deficits are often employed to explain exchange rate behavior, NONE has been found to be consistently useful in forecasting exchange rates, even over substantial periods of one or two years.”

And to paraphrase what he means: Point blank. All the typically cited statistics and “reasons” for predicting currency values are fairly useless…Which is why I rarely allow myself to predict currency markets based on anything other than my perceptions of where all the “players” are “in the game”.

The significance of this is, about the ONLY time I ever trade the currencies is when my senses tell me, EVERYBODY is on one side of the fence…because I “know”, if my observation of that sentiment is accurate, “everybody” WILL be wrong…Last week as I was doing one of my routine “scans” of the markets, the long term Eurocurrency chart shown above kind of hit me over the head…My first thought was, as I’ve already expressed, “This thing doesn’t look BAD at all. I know everybody seems to hate it. Everybody has been trashing Europe. There are plenty of ‘logical’ reasons to short the Euro. Why ISN”T it trading 20 or 30 points lower?”.

Then I dug up the next bit of information….This sort of chart may be a little difficult to interpret if you haven’t seen this type before…Hopefully, my comments will help clarify what you are seeing here…

Here is the same chart with a little more perspective…

I’d also note, if you look at the blue line representing Small Speculators (the classic market fodder), they too are shorter than they have ever been…

To some extent, this is a great example of my conviction the markets are all about mob psychology. “Everybody” who speculates was short, BIG TIME, dead on those June, 2010 lows…and you can bet they all were doing so with tons of expert/media “logic” to back their opinions, and full of confidence they would make a lot of money on the short side…And they, and all their logic, were dead, dead, dead wrong…right in front of a 20 point ($25,000 per contract) rally that occurred over the next 10 months…

And I think that is EXACTLY where we are again…that the Eurocurrency is headed up, again, AT LEAST to the 1.50 level.

Think about it…During the last 6 months, this UNENDING barrage of airplay has suggested that Greece, Spain, Portugal, Italy and even France (among various other small players) were all on the edge of some sort of economic black hole, which aside from seeing the Euro disappear, would also potentially collapse the entire world economy? Come on! How can it get any more bearish than that? THE EUROCURRENCY IS A BUY.

The truth is, I see the Euro as a buy in the very same way our stock market was a buy in March, 2009, when the Dow had nosedived to 6500…DO you remember what it was like then? How scared everybody TRULY was? How there were very real and VERY loud fears the system was about to collapse? HOW THERE WAS NO REASON TO BUY IT? Ask yourself, really, how is this any different from the Euro today?

Again, take another look at the longer term chart…145-150 would NOT be a big deal here…

CONCLUSION

I believe there are three GREAT ideas here, and though I am obviously biased, I am extremely confident my expectations will prove correct in all three.

Here is a final recommendation…

If you like one of these trades more than the others, go for it.

But what I would really suggest is the following…

Treat this as a portfolio…Take positions in all three. Depending on how you do it, each three market unit would be in the $7500 range…If I am wrong in all three, you will probably lose everything you invest. If I am right about just one of these markets, I think you will still come out a solid winner. If I am right about two of them, you will probably make a LOT of money. And if I am right about all three…and I absolutely believe this is possible…there is no telling how wonderful the return might be.                     

I don’t ever put anything in this letter I don’t totally believe in…but there are times I sit here, at the culmination of all my latest research and ruminations, and think, more strongly than my norm, “This package of ideas will make a TON of money. Just got to do it right. Just got to put the positions on. And then just got to let it happen.”

And that is exactly where I am now. I may be dead, dead wrong, which would mean losing, not making, money, but I do think there IS a ton of bucks in these three ideas. You just have to pull the trigger…and write the check.

Totally committed to a great 2012.

Thanks…DO give me a call…I think this is one of my best newsletters ever. Maybe wrong. But that is what I believe.

Bill

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