June 25, 2013
WE HAVE EXITED ALL SHORTS IN THE DOW JONES FUTURES.
The Sell Off/Correction has already happened.
I look for stocks to soon resume their bull move.
When I exited all long positions in the stocks indices in early May (5/9) and went short (5/16) , I did so with the idea the market was ready for some sort of sell off that might be weeks…or many months…in duration. With the Dow now having come down almost 1000 points from its May 22nd top tick, and with the realization many talking heads…who FINALLY got bullish 1000 points ago…are NOW bleating, “We’ve started a correction!”, I have exited all short positions as of yesterday as I pretty much think the worst is over on the downside. I will not be immediately going long again but I do expect to be doing so in the fairly near future…The truth is, another 300-500 points lower would not surprise me at all but I still prefer the sidelines…In my opinion, this IS a MONSTER bull market, and as we make the next move up, I would bet the TV Yakheads will be right back on their bearish wagon, preaching extreme caution (bearishness), with their new mantras being, “The Fed has taken away the punch bowl” and “China/Asia is in trouble”…and whatever else they can find to be wrong about.
WHAT I DO WANT TO BUY, RIGHT HERE, IS THE TREASURY BOND MARKET AS I BELIEVE…
LONG TERM INTEREST RATES ARE HEADED LOWER.
I AM BUYING TREASURY BONDS.
Before I even start here, if you are not familiar with the Bond market, it is important to note: Bond prices go down when long term interest rates are going up…and Bond prices go up when long term interest rates are going down.
I am relatively certain my statement that interest rates are headed lower will have the overwhelming majority of people thinking, “This guy is truly stupid. Doesn’t he know rates are going higher? Everybody knows they are low and can only be going up from here.” And maybe they will all be right, and I will be dead, dead wrong…but what follows here is a very brief synopsis as to why I believe the seemingly faultless “logic” that “Rates gotta go higher!” is incorrect, and why I am buying Treasury Bond futures here.
I THINK TREASURY BONDS CAN EASILY RALLY 15 POINTS ($15,000 PER FUTURES CONTRACT) FROM CURRENT LEVELS BETWEEN NOW AND YEAR END.
First up, when we are talking Treasury Bonds, we are essentially talking about long term interest rates, not short term rates which are essentially at zero and will be staying there for quite some time.
On the other hand, the fact is, long term rates HAVE BEEN going up for the past 11 months (in erratic stages) and it is only now, following the Fed’s recent hints of “tapering” or ending QE III (their long term securities buying program), that headlines are popping everywhere that “Interest Rates Are Heading Higher”, the rationale being that if the Fed doesn’t continue buying, how can Bond prices possibly stay at current levels? And well…I tell you that they can…and also that Bond prices can go higher (meaning long term rates going back down again)…in fact, I firmly believe Bond prices can go all the way back to their highs from last year.
To help put the QE III in perspective, take a look a few numbers…
The size of the global bond market is currently estimated to be about $100 TRILLION.
By the most recent calculation I could find, here in the United States, the average daily trading volume in Bonds is around $822 BILLION….DAILY…and again, that’s just here in the USA.
Now compare those numbers with the fact the Fed’s QE III has been spending $85 billion a MONTH, buying a roughly even quantity of US Treasuries and Mortgages…meaning, if you consider 20 business days a month, about $4 billion a day.
The point is, the Fed is NOT the only buyer in the game…Yes, QE has been a factor (perhaps psychologically more than anything else during the past few “nervous” years) but that $4 billion a day is NOT the only buying coming into the bond market.
THE FACT IS: EVERY DAY, ALL OVER THE PLANET, THERE ARE MANY, MANY BILLIONS OF DOLLARS THAT HAVE TO BE INVESTED IN SOME KIND OF BOND OR QUALITY FIXED INCOME. Whether it be pension funds, or banks, or insurance companies, or governments, or individuals or whatever…EVERY day there is a mountain of money that cannot just sit there earning nothing. Whoever is responsible for investing or reinvesting those funds HAS to do so, that same day (generally) at whatever the current rate may be. They cannot, for example, say to themselves, “I don’t like the current rate. I think I’ll wait until it gets better”. They HAVE to pull the trigger and invest the money. MANY BILLIONS, EVERY DAY…So I assure you, if the Fed were to say, “ We are going to totally stop buying Treasuries tomorrow” (which is not the case…they will “taper” their buying over time), it would still only be a drop in the global bucket as to what is out there waiting on the buy side…Again every day,…So the point is, contrary to all the supposed expert and media “logic” you hear, just because the Fed is going to slow down and eventually terminate their buying does NOT mean that bond prices are going to fall off a cliff due to no demand for the instruments…nor that rates are going to go rocketing higher. There is a TON of daily demand for US Treasury Bonds, otherwise known as THE safest piece of paper on the planet.
While there are myriad other bullish bond factors I could go into here (rates are low all over the globe, baby boom demographics as investors, inflation is a non-factor, etc.)in the interest of brevity, I am going to just leave it there for now and move on to other markets.
I will finally say though, as I have pointed out for years, the Treasury Bond market is THE CONTRARY OPINION MARKET. In my opinion, the people who trade it and write about it are perennially the biggest sheep in all the markets…They are all at their loudest (and “wrongest”) when they are certain everybody is thinking exactly as they are…And when you can detect they are ALL singing the same song, ALL espousing the same “logic”, it means you need to be looking at the other side of the equation…which is precisely the situation we now have…
Here is one option I like here…I am also buying futures with at the money puts against them…
Exited all short positions in Gold and Silver
My opinion on various markets is not the only factor involved in the recommendations I make. Even though I may have a strong long term opinion about the direction of a particular market, I only want to be in a trade when I think the set up argues for a relatively sizeable move being imminent. When you are primarily an options buyer…as I am…a sideways market can be just as costly as being dead wrong. With this in mind, while I think Gold and Silver have nowhere to go but DECIDEDLY lower over time, my current feeling is, “Could be ready for a rally. Could be sideways. So leave it alone (for now)”. I therefore no longer recommend owning short positions in Gold and Silver (for the time being.) I do so with the fear I am getting off just before the “big one” hits (truly massive sell off) but I have to go with my instincts…and those instincts tell me to let everybody else jabber about whether the precious metals are a buy or a sell here. Six months ago, regarding Gold, all I ever heard was “BUY!”, and not a world about “Sell”. Now that it’s $600 off its highs, opinions seem to have loudly appeared in the media on BOTH sides of the market (AFTER a sizeable move)…Right or wrong, my experience under such circumstances leads me to conclude: “market going nowhere”. SO I AM NOW SIDELINES IN GOLD AND SILVER.
Corn and Soybeans have beaten me up…
But I still recommend being Short “Old Crop” in both markets
I have been recommending the short side of these two markets since late last year, and while Corn has come down some (but not enough) and with Soybeans having recently rallied to new 8 month highs, my involvement in both these markets has been a net money losing experience for the bulk of 2013. Nevertheless, I continue to believe they could both still have sharp sell offs during the next month or so…Unfortunately, however, the July options have now expired in these markets, leaving only the futures contracts as a vehicle in July Corn and July Soybeans, or the August options in Soybeans…There are also Old Crop-New Crop spreads which can be shorted but trying to explain spreads here would probably be like writing this thing in Greek to most of you…So I quite honestly sit here and think, “What do I say?”.
And this is it…I’m still short…reluctantly using whatever approaches there are as I do continue to think the last chapter in this old, old story of “tight supplies”, and its implication that there is no way old crop Corn and Soybeans (harvested last year) can go down, will end with both of these markets falling out of bed as they approach expiration. Perhaps wrongly so, I still think any down day can be the beginning of what will become a free fall…that there are mountains of product out there waiting to be sold at higher prices…but will ultimately be sold much lower…SO I REMAIN SHORT JULY CORN AND JULY & AUGUST SOYBEANS.
I should also add I currently have no net positions in new crop Corn (September 2013 & December 2013) or new crop Soybeans (November 2013). I will say that my impression is 99% of the trading world seems to be quite bearish new crop Corn and Beans which definitely makes me leery of the short side.
Here are a few ways I am maintaining my shorts in old crop…
I am vigorously Shorting Wheat again…
We started shorting Wheat last fall and were lucky enough to catch a decent move down which we exited on March 14th. Since then, this market has been nothing but sideways but now appears to be ready (I believe) for another serious move to the downside. It certainly does not mean I will be right, but the chart below is what I consider to be my letter perfect definition of a trade I want to take any time it “appears”, WHATEVER market I see it in. In fact, on our website, under the heading, “A Basic Philosophy and the Both Sides Strategy”, I describe (copied below) what I believe to be the highest probability trade I know…again, whatever the market…and that IS exactly what Wheat looks like to me now…
From our website…
Select markets which have done nothing for a long time. If a market has been trading sideways for quite some time, probabilities "should be" (anything is possible in the futures markets) better it is soon going to move somewhere. Long sideways move are often followed by large directional moves.
Or select markets at price levels at which you can make the statement, " It will not stay here, and, in fact, should move a long way from here, one way or the other". As an example, you might look at a market making the same low for the fifth or six time in six months and say, "I don't know which way it's going, but it's not going to be right here six months from now". Obviously, it could be, but, again, probabilities "should" favor it moving away from this old low, and this move could be either substantially up, or down.
When you find something you like, put your money on it, but buy some options going opposite your opinion. This goes against everything you will feel. You think you are right or you wouldn't be making the trade. Most of the time, my recommendations are in units of two calls to every put for bullish opinions, or two puts to every call for bearish opinions.
That was written 15 years ago…and I still swear by every word in it…Now take a look at the Wheat chart and decide for yourself if it fits the trade I have described…
Wheat (a weed of sorts) has been planted "right up to the porch" all over the world. Georgia is not the world, by any means, but in many places the local grain elevators here are already full and the crop is not even half way harvested...to the extent Wheat is being "stored" in the field in VERY large plastic bags. This is not what I would call a bullish picture…
Here is the long term chart…
We are sidelines in Cattle
We have been short Live Cattle and Feeder Cattle for some months now but have recently moved to the sidelines. I basically remain bearish both markets but would like to see some evidence of their downside moves continuing before putting any additional funds on the table. Essentially, after a protracted move down, some sort of sideways action would seem likely…and my interest in this trade will go up only if Cattle start making new lows…thus perhaps signaling another leg down.
That’s it. Give me a call if anything here interests you…or…if you just have questions…
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Treasury Bonds, Corn, Soybeans, Wheat.