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May 30, 2008
This piece is way too long and feels somewhat disjointed, but since I haven't written anything for months, I figured I might as well cover all the bases. If you don't want to wade through all this hot air, you can get the general, unfortunately gloomy idea, by just scrolling down chart by chart.
There are so many geopolitical and economic cross currents in the markets today that it seems like absolute lunacy to try to predict anything...And one thing my 28 years in this business have taught me is, even under "normal" circumstances, no matter who you are, how smart you are, how hard you work, how perfect your reasoning, or how good your instincts are, NOBODY knows what is going to happen...Sometimes you get it right (and more than likely not even for the reasons you thought important) and sometimes you just don't get it at all. In those 28 years, on many occasions I have experienced feeling like a futures market Einstein, and just as many times, if not more, I have felt immensely less intelligent than our nose-for-a-brain family beagle.
So here are my two cent opinions,
Some lengthy, some very brief,
Some I'm putting money on,
Some I am not.
In the end, however, it's every man's call for himself. I may be a "pro" but I probably don't know any more about what's going to happen than you do...And one of the things these almost three decades (yikes!) have taught me is to keep reminding myself that "I don't know". To me, this stuff is math, educated guesses and calculated risks...and hopefully a little luck once in a while.
I believe long term interest rates are headed sharply lower.
Buy Treasury Bonds
(They go up when interest rates go down)
The decline in real estate prices is far from over and will probably get  a LOT worse.
With the current state of the economy, the idea the Fed is even
remotely close to raising rates is ludicrous.
I have NO idea as to how far the whole housing debacle will extend but when I see developments full of brand new (year old) totally finished houses with prices already whacked 10-15% and zero traffic looking at them, I can't help but expect real estate prices can do anything but continue to fall...There's one example right down the street from me...$500,000 homes that were finished last summer, 13 of them occupied and 28 still sitting there empty. It's late spring, they've lowered prices by $30,000 to $50,000 a unit and the place is still like a ghost town, not even an agent on the premises. Maybe I'm wrong, but my guess is easily 25 of them will still be unsold come winter when the housing market dies for the year...and those houses won't have a chance to get moved until 2009 when they'll be probably be priced deep in the 300's...
Not to mention that...
Most anybody who wants to buy/move can't...until they sell their own decreasing-in-value home...which generally is just not happening right now.
Most anybody who bought a house in 2006-2007 (and I don't mean subprimers) may easily already be underwater...I don't know the exact national average, but I'd bet most buying was done with 5-10% down. With the nation wide decline in housing prices, this could mean many "normal" buyers now have a mortgage bigger than the value of their home.
Much of 2003-2006 boom here was financed by consumers sucking money out of their homes with prime equity loans. As/if the decline in housing values continues, many more home owners will also owe more than their houses are worth.
At some point (soon), I would guess the commercial real estate market should start to make nasty headlines, maybe worse than we've seen as a result of the residential market...All those new strip malls (on EVERY corner around here), malls and office complexes you see everywhere were built with the same "good times will never end" attitude that got housing in trouble...And as people have less and less to spend, many of those retail locations will have far fewer buyers than they need to stay open...Believe me, there is a mountain of CDO/mortgage paper (the stuff that made all the headlines) out there in commercial real estate that is NOT worth what Wall Street valued it to be.
None of the above will be inspiring people to go out and spend money...
And then you've got the oil thing...a bone crusher totally independent of the real estate disaster...
Oil is already killing the economy. Economic data from here forward
will dispel ANY notion of an economic recovery.
The energy situation that is murdering the average middle class family and below...whether it be to run their vehicles, to heat or cool their homes, or at the supermarket...the American consumer/economy must be buckling at the knees...Everywhere you turn, economic activity is being curtailed by oil prices...whether it's at the consumer or business level...I don't think the implications of the damage oil is taking on the economy needs any elaboration at all.
I am not an economist, and I may be so incredibly wrong, but I just do not understand how anyone can suppose the economy is bottoming out here...I know it will sooner or later, but right now, between the housing/real estate/energy crisis here at home and the ongoing wars in Iraq and Afghanistan, we are in more trouble than I can ever remember...and the last thing we need, or will get, is rising interest rates...
Every bull move I've seen in bonds was accompanied by one major theme
that argued (in error), all the way up, "Don't buy bonds".
This time around, the reason you'll hear NOT to buy bonds is "INFLATION!", as high inflation can offset whatever interest you are receiving for owning a bond...However, inflation has been all over the news for almost a year, which should have crashed the bond market, but bonds have, at their worst, only gone sideways for the last six months (charts below)...That this MAJOR factor has not even dented the bond market speaks volumes for its underlying strength...Putting it another way, if all the inflation we've experienced hasn't driven bond prices down, what will?
Beyond that, I firmly believe the whole inflation/rising commodity prices scenario is over. Oil is finished. The Grain "shortage" is finished. The precious metals bubble is finished...A year from now, most every commodity that is now generating perpetually bullish headlines will be, as they say, "on its ass", and the greatest concerns well may be about Deflation, not Inflation...Some of the commodity bullishness we've had is genuinely based in tight supply-demand equations, but some very large degree of the enormous price moves has come strictly from the speculative sector...and the combination of a dramatically slowing economy, overleveraged funds, increased production and reduced demand (high prices seemingly always lead to this) WILL mean lower commodity prices.
I may be dead wrong but I expect to see Treasury Bond futures at least in the upper 120's before this year is finished.
Short Corn-Short Agriculturals in General
There is no way you could have missed all the headlines about Ethanol and the Corn market lately...And if you remember, several months back the Wheat market was just all over the was Rice just a few weeks ago...the story being the world was "running out" of those and other commodities...Without going into a whole lot of "logic" as to why I want to be short corn, I'll just start with charts of what Wheat and Rice have done recently.
Need another example? Here's Sugar which was the first "darling" of the biofuels bull market story several years back.
I believe Corn will suffer the same fate as these three former commodity bull markets...Aside from the fact you KNOW it's being planted from fencepost to fencepost around the world, all the commodity market press I see in corn routinely points out it is following crude oil...Why then, has Corn not moved up at all during the last two months while Crude has rallied $35? Bottom line is I believe this market is jam packed with speculators who mistakenly think this market is bullet proof...and the next move is going to be sharply lower, with $4.00 a bushel ($2.00 lower, $10,000 per futures contract) being a likely target.
Just remember, they don't have to take years to develop new mines or build new factories to ramp up production. That's the primary reason you see all those big bull moves crash just as abruptly as they went up...or even faster.
Sidelines in Cotton
After owning it for years, those trusting souls that were still in cotton finally scored VERY large percentage gains on the INCREDIBLE run up that occurred from mid February into early March. On the chart below, you can see a roughly 25 cent move that took place in 15 trading days. The truth is, due to the fact there are no daily trading limits in Cotton options (as opposed to the 3 cent normal limit in futures), the move up actually hit somewhere in the $1.09 area, making the move more like 40 cents (one cent move = $500 per futures contract) if you were in the option markets.
This recent activity in cotton is a great example of the oftentimes random and volatile nature of the futures markets...I have yet to see an explanation for what has taken place in cotton during the past few months, nor do I expect to. We were lucky enough to unload all of our long held option positions dead into the last two up days of the move, then watched the market drop straight back down the full 40 cents during the next three weeks. We took a stab at it once after it had dropped roughly 30 cents (and kept falling) but other than a few small stabs at buying again, I have pretty much been preferred the sidelines since the May options ceased trading on April 11th. Simply stated, it just reaffirms my conviction that no matter how strong, how logical, how seemingly perfect your opinion, there is no way to know what the markets are going to do. You can make some decent guesses, but that is all they are...whether you trade charts, or fundamentals or sentiment or the stars...
With my dismal view of the economic situation, I am disinclined to be a buyer of any raw commodity markets right now, cotton included...I will say cotton is certainly seeing major acreage reductions again this year, and in the perverse way cotton went no where for years while everything was booming, it would almost seem fitting to see this market start up in the midst of a lousy economy (it's happened before)...At any rate, after having "lived" with this market for years, I'm presently content to accept our gains from the March rally and look elsewhere for opportunities.
Crude Oil is heading South
I don't see how Crude can do anything but go down from here. At current levels, it very much reminds me of one of my first dumb luck, but common sense, predictions when I entered this business in late 1980. Bonds were trading in the 50's and the Prime Rate was at 20% with the world screaming, "Prime is headed for 30%!". My simplistic conclusion was this could not possibly be true as the capitalistic system would cease to function, and collapse upon itself, if rates stayed at 20+%, much less 30%, for any length of time at all. With Crude at $130-$135 a barrel, I think you now have the same thing...Either it backs off due to "natural" market forces or these prices have reached the point where, together with the credit and real estate busts, the US and world economies are about to truly go over steep cliffs...and demand for energy with which case crude prices come down anyway.
Between July, 2006 and January, 2007, spot Crude Oil dropped from $78 to $50 a barrel in what was then only a 38% correction. As 30-40% rapid breaks in ALL of the commodity bull markets have become the corrective norm during the past two to three years, it would not surprise me in the least to see Crude back at $70 to $80...and a hell of a lot faster than anybody would ever in two or three months time...I believe Crude has reached the "Gaga" stage...where people are dumbfounded by the up move and just sitting there watching it happen with the idea it will be stopping anywhere soon just totally out of the collective, mass opinion picture.
Bottom line...I think Crude has to go down from here, or the world economy is going to take it down with it, one way or the other.
A Stronger Dollar
I started buying the Dollar Index again in December when it was trading in the 76.00 area and have watched it fall as low at 71.00 a month or so ago...Back in December, we started with units of March 77 calls and March 76 puts and most recently have repositioned in June 73 calls and June 72 puts. I still think it is a major buy with tremendous leverage and am now taking new positions in the September contract. If you want my useless reasons for owning the Dollar, they are the same as they were in December and here is a link to that newsletter -
The dollar index is a composite measured against 6 other currencies...the Euro, Swiss Franc, British Pound, Swedish Krona, Japanese Yen and Canadian Dollar...If you think their economies are in perfect shape, think again. If you think their economies are not tied to ours, think again. If you think there is not something special about our unique geographic location on this planet (not jammed shoulder to shoulder with our major ideological enemies), or that there is more of a desire to be here, visit here, immigrate here or own here than any other country there is, think again. Maybe all of this is meaningless, but I just don't buy the idea the Dollar and USA can only be going to hell without taking the world with it. Everybody wants a piece of what we have here, and with the dollar where it is, everything American is on sale internationally and money is headed this way. This should mean, to me anyway, a higher dollar...
Where it will be a year or two or five in the future, I don't know...But right now, my instincts tell me (and have incorrectly told me for a while) this is a market to own, mainly because everybody seems so sure it can not possibly be going up...Maybe I'm wrong, but to see it rally 7-10 points ($7,000-$10,000 per futures contract) from current levels just wouldn't seem like that big a deal.
I do have to say my one major worry with this position is the Dollar and Bond markets have historically tended to move opposite each other. This is by no means an absolute relationship, but buying them both may mean being dead right on one, dead wrong on the other.  
Precious Metals
Can you say "BUBBLE"? That has become the expression du jour for describing any market that goes to the moon with, in the end, a gaggle of folks all over it and this is how I see the gold at $1000 an ounce...I know there at least a few of you (especially one savvy Louisianan) who will swear I still just don't get it, but to me, Gold is just another commodity that goes through normal perceived value fluctuations, whether you want to look at it from a daily, monthly, yearly or even decade long perspective...that it is just another commodity subject to mass hysterias and periods of popularity but most likely will be semi-permanently returning to much lower levels...I don't buy the idea we've entered some period of unpreventable hyper-inflation, or that we will ever revert to anything resembling a gold standard based currency system, or that the world economic system is going to fall apart....and the bull market in gold, which has seen a 400% ride, has probably ended.
Short Cattle Markets
With the average consumer probably in the worst shape in decades, I cannot imagine how the cattle market can remain perched here at its present all time highs...I know (and the market knows) cattle numbers are down due to last year's drought in the Southeast but I still suspect the general public is just not going to be hitting the steak houses nor the supermarket beef counter with the same dollars as was the case in years past...And the current almost euphoric prices for cattle on the hoof will be tumbling in a big way.
The Stock Market
In my lifetime, we have been through a number of economic crises, but never anything like we're experiencing now...where you have all these major problems (housing, energy, wars), in some ways related to each other but really all quite independent situations...and it's just hard to be my usual optimistic self and envision everything working its way back to "rosyness". So when I look at the stock market, which I hate to ever even begin to guess as to direction, and I just can't see it anywhere but VERY much lower than it is now. Both the oil and housing situations have been eating at people for a year now, but the Dow, for one, is still about where it was last spring. I suppose this might have something to do with the dollar having increased exports, or robust military spending to support Iraq and Afghanistan...or just Wall Street AIR...At any rate, not necessarily because of any particular news or event, I can imagine it beginning a descent that takes the DOW, for starters, easily back under 10,000...Talking to brokers and investors concerning stocks, I get the impression everybody is just sitting on what they own, neither buying or selling, and have been that way for some time now. This leads me to conclude they probably SHOULD BE doing one or the other in a significant way...and their next big move, forced by the market, may be selling in a major way, as the market is tumbling sharply lower...Admittedly, I may be just dead ass backwards, that I'm saying sell this thing when all the bad news is really a contrarian's signal to be a big buyer, but I have to go with my perception things are still going to get a lot worse than they already are.
That's all folks...If you've read this far, I'll say thanks for the time. Hopefully some of this is right, but if so, like I said in the beginning, it's probably for the wrong reasons.
If you like any of these ideas, or just want to tell me what an idiot you think I am, feel free to call.
Bill Rhyne
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