June 22, 2008
These are random thoughts generated by what I read and what I am personally hearing from people I talk to....
I believe most stock market participants are just sitting (suffering) on what the own, hardly opening their brokerage statements, now blindly trusting in the idea "the market always comes back". While statistically this has been true...at times it has been so only if you are willing to ride through 30-50% losses lasting for years at a crack.
Lots of people think the market will be all right because "this is an election year". In the same vein, I've also heard many times, "There are tons of cash on the sidelines", which at some point, "should" mean buyers coming in in droves, turning the market up...I swear, over the years, every time I have heard that stuff about "lots of cash", it meant "SELL!", with both hands...
I think economic conditions are worse, by far, than they have been in my professional career.
I see nothing on the immediate horizon to change the downward course of housing prices, which is a big deal.
I would not be surprised to begin seeing startling losses, maybe bigger than in housing, coming out of the commercial real estate sector. Just like houses, there was a mountain of loose lending that went on in malls, condo's, office buildings, etc...When folks can't afford their rent, or their wheels, it directly affects just about any business there is...and a lot of commercial spaces may end up, like houses, with nobody there to occupy them.
At brokerage houses, nobody is either buying or selling...just waiting...doing absolutely NOTHING. As a trader, this tells me one of two scenarios is coming...Either the market, right now, is a roaring buy and somewhere down the road you will see everybody clamoring to get in after a 2000-3000 point rally...or...the market is going in the tank and somewhere down a far nastier road you will see the brokerage house phone lines overloaded with people selling everything they have...I hate to say it, but I think it will be the latter.
Bottom line...I think you sell Stocks and Commodities (Oil, Ags, Metals)...and BUY TREASURY BONDS.
The "pro's" will tell you, "You are crazy to buy Bonds here. Long term interest rates can't really go any lower from here. And don't you know inflation is running rampant!? "...The truth is, for the better part of the 20th century, bond yields were easily 2% or 3% below where they are now...And as for inflation? I think that whole story is classic yesterday's news and deflation (led by real estate prices) may become a major worry in the quarters to come...I'm sure you've seen the story a thousand times as to China and India gobbling up commodity supplies and being very much responsible for the price inflation we have had the last few years...If this is so, what does it portend when you note the Chinese and Indian Stock Markets both closed into new six month lows on Friday and are down 52% and 30% respectively since last November? Unless their equity markets are totally meaningless, I'd say it means a monumental slowdown may be coming in Asia and you can toss the idea of this "never ending" commodity bull market (according to the media/experts/economists out there) smashingly out the window.
The 30 Year Treasury is currently yielding about 4.7%. I think it will be at least a full percent lower within the next 6-9 months and Treasury Bond futures will trade at least 10-15 points above current levels.
With whatever strategy you want to use (futures, calls, straddles, etc.), I strongly recommend owning the September, December or next March Treasury Bond markets....If I'm wrong, you may lose what you invest...If I'm right, I think it will be very much so and the percentage return could be quite large.
I know this is certainly not totally the case, but I was recently told by one generally well informed broker, "Besides one other guy, you are the ONLY Bond bull I know of"...As I have long considered Treasury Bonds to be THE contrary opinion market, I very much like the fact I may be "alone" in believing they are a monster buy.
I've got my money on this idea. Give me a call if you want to join me in my insanity.
I may be wrong but I see Bonds, any day now, beginning one of their classic 10-15 point bull moves...
During the last 20 years, at some point between January 1st and expiration, the December Bond contract has had some sort of rally in every one of those 20 years. THERE ARE A FEW SMALL ONES, BUT IN 17 OF 20 YEARS, THAT RALLY WAS FOR AT LEAST 9 POINTS. THE LARGEST RALLY IN THE DECEMBER CONTRACT, SO FAR THIS YEAR, IS 5 28/32. This certainly doesn't mean they do have to go up from here but it certainly suggests it is a strong possibility...and again, all we need is 5 or 6 points to make this trade have been "worthwhile".