February 27, 2014
The Stock Market? The “Correction” is over?
It’s just not that easy…
I REMAIN BEARISH
Seems like 99% of the forever wrong talking heads are dead certain the stock market has now experienced a “healthy correction” and there is nothing but clear sailing ahead.
I DISAGREE…BACK IN DECEMBER I SAID I THOUGHT STOCKS WERE HEADED LOWER FOR THE FIRST PART OF 2014. AT THAT TIME I HAD NO SPECIFIC TARGETS IN MIND BUT I NOW BELIEVE THE ODDS ARE THERE WILL COME A TIME IN 2014 WHEN THE USA EQUITY MARKETS, AT A MINIMUM, WILL HAVE FLIRTED WITH A 20% DECLINE…OR IN OTHER WORDS, OFFICIALLY BE LABELED AS A BEAR MARKET. Furthermore, I think this universally popular idea, “We’ve had a healthy correction”, will quite soon be blown right out the window.
I CONTINUE TO THINK YOU SELL STOCKS HERE. NOW.
26 years ago I left my job as a commodity broker with Merrill Lynch in Atlanta and headed off for a year in South America. Several months into the trip, specifically on October 19,1987, I sat in a hotel room in Santiago, Chile and saw the following headline on a TV screen: DOW JONES BAJA 500 PUNTOS, or, DOW JONES DOWN 500 POINTS, which at that time was almost a 20% loss in a single day. This was a horrendous moment in stock market history and while it didn’t affect my life in the slightest (on the road with a backpack and a guitar) I will never forget the visual…or what it reminded me, that being, THE DOW TELLS THE STORY…not the S&P and not the NASDAQ. They FOLLOW the Dow.
Though the idea is often expressed that the Dow is too narrow a gauge, I have long believed otherwise…that what is happening with those 30 companies is the most consistent leading indicator of what is happening with the stock market as a whole…and I now significantly note that even though the S&P 500 and NASDAQ have fully recovered back to their highs, the Dow is not even close to doing so. The Dow leads…the NASDAQ is the speculative tip of the whip’s tail…and my guess is the Dow will NOT take it out its all time high made December 31 of last year…and somewhere soon, stocks, led by the Dow will begin to roll back over again.
I would hope that most of the people who read this must have some sense that the overwhelming majority of the “pro’s” you see in the media really DON’T have a clue about where the markets are going, that when you can detect they are all singing the same song you need to RUN in the opposite direction? If so, consider this: Have you EVER seen so many of those guys so ABSOLUTELY certain “the correction is over” and the rest of this year can only be up? Have you? I sure haven’t…NONE of them saw the January sell off coming…and now they are all so gleefully bullish it’s almost comical…What’s one of the mantra’s I’ve heard over and over lately…including today? “PE’s are low. Companies don’t have much debt. And they all have lots of cash.” Classic nonsense posing as logic to me…
Anyway, here’s a graphic look at the way I see it…
As this newsletter is simply a brief update, if you are interested in the reasons for my bearishness, they can be found in my December 11th newsletter at the crokerrhyne.com website…In a nutshell, I DO THINK THE ECONOMY IS ON VERY SOLID FOOTING BUT THIS DOES NOT MEAN STOCKS HAVE TO GO UP. As always, I remind you the markets are nothing but a mob psychology game and I firmly believe the next move in equities will be sharply to the downside, and that in the months to come, all that glib “this is so easy” bullishness from the TV/Internet painted faces will eventually devolve into overwhelming FEAR and PESSIMISM.
As the last thing I’d expect is a prolonged sideways move, this is the perfect place for owning units of 2 puts and 1 call…that is, the market is either going high enough to have the one call option recoup what you have invested in a wrong way trade, or, you’re going to have two puts working for you in what I just can’t imagine would be anything less than a 15% (2500 points) move…The other approach (outlined below) would simply be to buy puts here, and if the Dow does make a new high, get out of them (take the loss) and reassess the idea.
Still Buying Treasury Bonds
As I have written for years, there are no greater sheep in the investment world than all the Economists, Bankers, Analysts and Advisors who comment on interest rates...and in this business, more often than not, following the crowd, especially in Bonds, can be akin to running with a horde of lemmings. Believe me, I don’t sit here all the time and just think, “everybody else is stupid and I am smart”, but the truth is, there is not enough room in my office to store all the totally wrong way opinion I have seen written on Interest Rates and the Treasury Bond market for the past 30 years…And it is no different right now…All those same sheep are now unanimously on board with the idea “Rates have to go up” and my bet is they will be just as wrong as they always are.
Rates DON’T “have to go up”. As I’ve repeated so many times, there are billions of dollars, every day, all over this planet, that do HAVE to buy fixed income, no matter what the interest rate may be…and US Treasury Bonds are still the safest piece of paper there is…Aside from that, inflation, which is the only real potential immediate threat to bond prices, is virtually nil. To me, Treasury Bonds are still an enormous BUY and I still look for at least another 10-12 points (10-12K per futures contract) on the upside before we get to summer.
Think about it…Those wrong way guys have FOREVER been talking about rates going up…and bonds going down…and how when the Fed started to “taper” that bonds HAD to hit the skids? Well, since they started the taper in January, Treasuries have already seen a 7 point rally…which WASN’T supposed to happen. They’ve backed up a few points during the past 3 weeks but I see this as a normal pause…and after last week’s supposedly bearish Fed announcements, which were followed by nothing but rising bond prices, I firmly believe they are now beginning to VIGOROUSLY resume their bullish move.
All option price quotes in this newsletter include all fees and commissions.
Here’s another way to go…
There are various ways this position can lose money, the worst case being that the market stays under 132, in which case you would lose 100% of what you have on the table. On the flip side, I would estimate that about a 2 ½ point move up from here would make the 132 call worth the $3820 necessary to recoup your original investment. Thereafter, if the May 138’s do get in the money, each 1 point move would mean an additional $5000 in intrinsic value (5 x $1000).
As a final note regarding Treasury Bonds, I asked myself the following question today: Is the Ukraine situation going to quickly diffuse?
My answer? No. Not a chance. Too important to Russia…and Ukraine is a country too divided. And I would think that some degree of 20th century Russia vs USA (and the west) brinksmanship will now be in the cards…AT LEAST for the next few weeks and possibly much longer than that. This situation is not an “Arab Spring” sort of event where the West looks on and shows concern but really is just thinking, “What a mess. Let them fight it out between themselves. Then we’ll deal with whomever comes out on top”. Ukraine is different. It really does have the potential to muster up old Cold War tensions…with fears, or the reality, of Russian tanks entering the country “to restore order on our borders”, which would then be followed by some form of an undoubtedly forceful response from Europe and the USA…And then what?
The point is, while I can imagine the threat of a Russia vs The West/USA confrontation actually pushing stocks lower OR higher (perversity of the marketplace), I can only envision ONE effect on US Treasury Bonds…and that is higher…Just about ANY time there is international geopolitical tension, Treasuries go up in what is always described, rightfully, as, a “flight to safety”, and with Bonds already perched on their recent highs, and with my suspicion that tensions ARE about to rise, I am fully aware that this is potentially the “perfect storm” for a LIFT OFF in this market…and I am ready to act accordingly.
I AM STILL BUYING BONDS AND I WILL BE STILL BUYING THEM AS/IF THEY DO MOVE HIGHER FROM HERE.
YOU NEVER KNOW WHAT IS COMING IN THIS STUFF, BUT THERE ARE TIMES WHEN EVERYTHING DOES SEEM TO LINE UP…AND WHEN IT DOES, IT SOMETIMES PAYS TO HOIST YOUR SAILS AND JUST RIDE WITH THE WIND. My guess is the Ukraine WON’T be calming down in the days ahead…and it will be very interesting to see where Bonds are a week or two from now. Maybe nowhere. Maybe a LOT higher. Anyway, I am ON them and firmly continue to recommend buying calls in the June contract…We’ll see.
Still looking for a collapse in Cocoa
During the past month, on more than a few occasions, Cocoa has looked like it was about to bust out and run to new highs. Maybe it still will but my guess is all of those potential “breakouts” were nothing more than classic fake outs, or bullish traps to suck in more speculators on the long side. Every story I see about this market is nothing but bullish, some of them bordering on the absurd (for example, how Americans were buying more dark chocolate for Valentine’s Day?), and all of them including the line, “demand is expected to exceed production this year.” Meanwhile, I keep looking at the chart that follows, indicating that speculative traders are already holding record long positions with commercial interests holding record shorts, and only think it’s just a matter of time before this market goes seriously in the tank. See for yourself…
The markets move as a function of traders getting in and out of positions, and while commitments are by no means an absolutely perfect indicator, I have seen this sort of speculative overload culminate in large percentage sell offs on too many occasions to expect anything other than that. As noted in previous newsletters, 15-20% several month declines have been almost routine in Cocoa and I am expecting nothing less than the same right now.
My approach from here forward is pretty much to keep some money on the short side here until it DOES get hit. We are still currently holding May puts, which offer considerable leverage, but it probably makes sense to now establish any new positions out in the July contract.
Still Short Cattle
Still see Live and Feeder Cattle as a MAJOR SHORT
I am now seeing bullish stories seemingly inferring “cattle will never go down again” all over the place in the media…and as noted before, this whole “there are no cattle” story definitely reminds me of $1900 Gold, $50 Silver, $8.00 Corn and $18.00 Soybeans during the past few years; the point being, all of those supposedly bullet proof markets ended up by totally surprising all the analysts (NO surprise in itself) and losing anywhere between 30% and 50% of their values…
I think we will see something of the same in the Cattle complex this year…and I literally believe it can start happening any day now. Very much like the Cocoa, my approach from here forward is to own puts in both Feeder Cattle and Live Cattle until they DO suffer the same fate I have seen a 1000 times in this business…Where roaring bullish stories turn into horribly nasty bear markets.
IT DOES NOT MEAN I WILL BE RIGHT BUT WHEN I LOOK AT THE FOLLOWING CHART, ALL I CAN THINK IS FEEDERS ARE ALMOST A BLIND SHORT.
I have pretty gone full bore short cattle from here forward. It IS my intention to now continuously own puts towards the front of the market in both Live Cattle and Feeder Cattle. I would also add this is one time when I will say it does not make sense to simply own “naked” puts. This IS the perfect place for the two and one approach as it is entirely possible this “rocketing” market can bolt higher, and using the 2 & 1 DOES put you in a position where if you are wrong, you ARE able to re-position, without fear, at higher and higher levels (if necessary)…IT DOESN’T MEAN I WILL BE RIGHT BUT I ABSOLUTELY BELIEVE THE CATTLE MARKET WILL GO DOWN FASTER…AND BIGGER…THAN IT HAS GONE UP. WHY? BECAUSE THIS IS THE NATURE OF THE BEAST.
Here are a few approaches with the Live Cattle…
And here are the Feeders…
Great trades here I think. Give me a call if you want to talk about them…or anything else…I always very much like to hear your voices and what you are up to in your own lives.
Thanks…Pick up the phone and call me.
The author of this piece currently trades for his own account and has financial interests in the following derivative products mentioned within: Dow Jones, Treasury Bonds, Cocoa, Live Cattle, Feeder Cattle.