July 9, 2016
The markets are not always rational…far from it actually…and I think this becomes particularly evident at the extremes we often see at market tops or bottoms…where the “values” of these PIECES OF PAPER we trade become severely distorted…on the upside at tops, and on the downside at bottoms. Think $150 Crude or $1900 Gold as recent “madness of crowds” examples…And then think Treasury Bonds at 177 today!
It’s all about mob psychology and I would offer that the various price fluctuations since the Brexit vote, in virtually every market we trade, just goes to prove that…As one prominent example, Britain’s surprise vote to leave the EU was supposed to mean economic catastrophe for the European and world economies, which freaked our Dow into an almost 1000 point drop in 2 days…BUT, within 3 days time, the Dow had recovered 100% of those losses…and yesterday closed into new one year highs…So, does this mean that the intrinsic values of those 30 companies actually changed that much, from positive to negative and back to new highs in a week’s time? And I say the answer can ONLY be “No.” Similarly, following the vote, Gold had a $110 trading range in the space of 6 hours, then finished the day up $65, and $45 off its intraday high…Again, DID the intrinsic value of Gold actually change so dramatically…both up and down?...Whether its Stocks, or Oil, or Gold, Commodities…or BONDS, we are all playing the world’s biggest mob psychology GAME…and whatever value a market has today is primarily a function of media/brokerage house driven perceptions which time and time and time again result in players in the game (investors) being led to financial slaughter…which is precisely where I see the Bond market today.
Treasury Bonds are priced for a worldwide Economic Disaster…
And it ISN’T coming
The Bond market rallied almost 8 points during the night and day following the Brexit vote, and has since (9 trading days) added another 3 points as talking heads galore have chattered about “the flight-to-safety”, and “US yields being the best on the planet”, and “the slowing world economy”, and “the disintegration of the EU”, and “commodity price deflation”, and how “the markets don’t like uncertainty”, and how “the recovery rally in US stocks is doomed to fail”. etc…etc…etc…the point being…HERE WE ARE WITH THE LOWEST RATES IN HISTORY, AND THE HIGHEST TREASURY BOND PRICES EVER…AND ALL SORTS OF NOVEAU INTEREST RATE GENIUSES ARE NOW FULL OF” REASONS” WHY RATES HAVE TO GO EVEN LOWER…AND BOND PRICES EVEN HIGHER….But I would adamantly remind you: These are generally the same people who were ultra bearish Crude at $30, or bearish the Dow at 15,500 back in January…and I maintain that anyone who buys Treasury Bonds here, either as an investment, or on speculation, is doomed to lose…and lose BIG.
Yes, I have been screaming, “Sell Bonds”, since January 25th…and yes, they are now higher…but that has nothing to do with where they will be 2, 3 or 6 months from now…All the nonsense about Brexit turning the world economy on its head is just nonsense…BUT IT DID PRODUCE WHAT I WOULD CLASSIFY AS A TOTALLY IRRATIONAL 10 POINT…LAST GASP…BOND MARKET RALLY THAT I ABSOLUTELY BELIEVE WILL STOP ANY DAY NOW…AND I JUST AS ABSOLUTELY BELIEVE THAT ANYONE WHO BUYS INTO THE IDEA THAT “RATES ARE GOING EVEN LOWER”, OR THAT OUR ECONOMY IS “WEAKENING”, OR THAT “GDP GROWTH IS TOO SLOW”, IS SERIOUSLY IN ERROR. As I keep pointing out, the roads, stores, malls and airports are jam packed. Money is cheap. Energy is cheap. Unemployment is low. Construction is going on everywhere. Cars and trucks are selling. Housing prices are rising. Household Debt as a Percentage of Disposable Income is at 35 year lows (as far back as there is data) …AND IN SPITE OF ALL THE “CRAP” THE WORLD IS SUPPOSEDLY ENCOUNTERING, WITH THE FACT THE STOCK MARKET IS STILL DEAD ON ITS HIGHS, I CAN ONLY CONCLUDE THAT THE NEXT MOVE IN STOCKS, AND THE ECONOMY, IS GOING TO BE DECIDEDLY ON THE UPSIDE…AND CONCURRENT WITH THIS STRENGTH, I ALSO CAN ONLY CONCLUDE THERE IS NO LONGER ANY REASON FOR RATES TO STAY AT THE LOWEST LEVELS IN THE HISTORY OF THE UNITED STATES.
I CONTINUE TO SAY IT---BUY STOCKS…AND SELL BONDS.
AND IT DOES NOT MEAN I WILL BE RIGHT...
BUT I DO THINK THAT THIS IS THE BIGGEST BOND TRADE EVER.
Here are some chart perspectives I find interesting…and I think revealing.
What follows is a more traditional "linear" chart...What I find interesting is that in spite of the ONGOING "Euro Angst" since 2014 (and all the other supposed “ills” the economy has been facing) perpetually stoking fears of worldwide economic collapse, we have seen EVERY sell off turn firmly up from the 15,500 area and then finish the year more or less on the highs (where we are once again). I have probably looked at more charts in the past 36 years than 99% of the analytic community, and while I KNOW that nothing about any chart represents an absolute, I will say that these past 3 years' performance overwhelmingly suggest a higher trade...And taking into account that this "consolidation phase" has involved 3000 point swings...to look for another "bar" or two taking us up 3000 or 4000 points through 20,000 is not at all unreasonable.
And if this IS happening…or even anything close to it…I assure you that any talk that “rates NEED to stay low” will disappear faster than any of the internet boobs could even BEGIN to imagine…and with Bonds (of all types) having OVER 1 TRILLION DOLLARS IN WORLDWIDE DAILY TRADING VOLUME, you’d better believe that characterizing bonds as going “straight down” could be an understatement, the point being, this is a BIG market and BIG moves are very much the norm (look at the last 2 weeks)…We ARE in the stratosphere and having seen this scenario play out with 20 point collapses on MANY occasions….from MUCH lower levels…I will continue to say that a 30-35 point downswing from here would be NOTHING….TO ME, WITH TREASURY BONDS AT 177, THIS ABSURD IDEA THAT NEGATIVE INTEREST RATES ARE A “NEW NORM”, OR THAT CENTRAL BANKS AND SOVERIGN FUND BUYING WILL MEAN EVEN HIGHER BOND PRICES, OR THAT THE ECONOMY STILL “NEEDS” SUPER LOW RATES TO FUNCTION…ARE ALL JUST THE LATEST VERSIONS OF THE SAME MARKET IDIOCY (MANIA) WE SAW BACK IN 2008 WHEN CRUDE WAS AT $150, WHEN VIRTUALLY EVERY ANALYST ON WALL STREET WAS YAPPING ABOUT “PEAK OIL PRODUCTION “ MEANING THE WORLD WOULD SOON BE “RUNNING OUT OF OIL”...AND PREDICTING THAT $200 WAS THE NEXT STOP…WHEN THE REALITY WAS OIL HAD TRADED BACK TO $30 WITHIN SIX MONTHS OF MAKING THAT $150 HIGH.
It happens all the time in this business…where public opinion BRIEFLY/TEMPORARILY prices markets at absolutely stupid levels…and that notion of “the bigger they are, the harder they fall” REALLY is often the case in the markets…And again, I don’t think it gets any “bigger” than Treasuries at 177.
GET SHORT NOW. JUST BECAUSE I HAVE BEEN SAYING THIS SINCE JANUARY, AND SO FAR HAVE BEEN SIDEWAYS TO WRONG, DOES NOT MEAN THIS WILL STILL BE THE CASE. I STILL SEE TREASURIES IN THE 140’S…AND FAIRLY QUICKLY…AND THEREFORE BELIEVE THAT THE RISK VERSUS REWARD IN THIS IDEA NEVER GETS ANY BETTER THAN THIS…I SAID IT SEVERAL MONTHS AGO AND I WILL SAY IT AGAIN…I WILL NOT BE OUT OF THIS MARKET…NOT FOR A SINGLE DAY.
Bull markets in Treasuries DO just stop on a dime and you can be certain they do so with the talking heads still presenting all sorts of “logic” for even higher prices…Having traded Bonds more than any other market for 30+ years, I have chart anthologies of every bond top ever made in them…and here is one that definitely reminds me of the present…
And you MUST understand…If they were 155, 6 months ago, they CAN easily be 150-155 a few months from now...It just how this stuff works...time and time and time again.
There are essentially three paper investment sectors: Stocks, Bonds & Cash.
But Treasuries are not even what I would call an “investment” here.
Here’s an expression you haven’t heard in a long time: “Investors rotating out of Bonds into Stocks”…I can specifically remember a few occasions when that same “event” just CRUSHED the bond market…and it always seemed to come out of nowhere…As stocks take off and attract more and more bullish attention, I THINK WE COULD SEE THE BIGGEST, NASTIEST MASS EXIT EVER FROM TREASURY NOTES AND BONDS, WHICH ARE BASICALLY EARNING NOTHING, INTO A POTENTIALLY ROCKETING STOCK MARKET…One of my impressions is that the dum-dum financial media’s negative economic drumbeat for the past 4-5 years has lulled a lot of people into thinking that they don’t need to be in stocks, and consequently a lot of public money has left the stock market for the “safety” of fixed income (bonds)…BUT…They are forgetting how that 100 year Dow chart I referenced for my sons continues to rise …and…AS STOCKS DO LIFT OFF, MY OBSERVATION OF HUMAN TRADING NATURE IS THAT THE COMBINATION OF RAPIDLY ADVANCING STOCK PRICES AND BETTER & BETTER ECONOMIC NEWS WILL RESULT IN A “ROTATION AVALANCHE”, THAT IS, INVESTORS WILL BE SELLING BONDS (POTENTIALLY INTO PANIC DRIVEN LOSSES)…AND GETTING BACK INTO STOCKS…THE BOTTOM LINE BEING, THE BOND MARKET WILL GET PLASTERED.
A final important note: Do you really think ANYONE at Goldman Sachs, JP Morgan, Citi, Merrill and all the other brokerages would seriously consider buying, for themselves, the same Bonds they are marketing to the public today? When simple math argues that those bonds basically have zero earning potential and ENORMOUS downside risk? Let’s get real…At current levels, they do earn NOTHING after taxes and inflation…And in the long term, the ONLY real way buying bonds here can EVER NOT lose you money is if rates NEVER go up again…which I will repeat…THE ONLY REAL WAY THEY CAN EVER NOT LOSE YOU MONEY IS IF RATES NEVER GO UP AGAIN…Think about that. Think about it again. TREASURY BONDS ARE SALE. HERE. RIGHT NOW.
Still Buying Wheat
Dead honest. The 60 cent rally in early June CONVINCED me that the bottom had been made in Wheat…but a $1.00 collapse in Corn helped crash Wheat back down hard into new contract lows…which I absolutely was not expecting…Nevertheless, this has not changed my opinion in the slightest...According to EVERY analyst I have seen, Wheat is still the most bearish commodity on the board (which was also the case some months ago in Corn and Beans before they rallied $.90 and $3.50 respectively), and with the funds still holding near RECORD SHORT positions against near RECORD COMMERCIAL LONGS, I will continue to maintain my long positions…with even more confidence than I had before…Like a piece of valued real estate, just because a market has disappointed you by not going up…yet…you don’t throw in the towel just because it is still in the hole…I’M NOT BEING STUBBORN. I’VE BEEN HERE BEFORE. AT $4.25, WHEAT IS A HELL OF A LOT BETTER BUY THAN IT WAS AT $4.70.
I would also add that wherever it was used, the 1 & 1 excellently served its purpose…to the extent that after a series of roll downs as Wheat sold off ALL month, we ended up repositioning in the 420 calls and 410 puts earlier this week…and then saw the Sept contract close today at $4.35, actually closing up for the week, thus creating what may have been a “key reversal” and also giving us positions that are pretty close to now being futures contracts…
Going back, as always, to my “mob psychology” theme, after the almost straight down $1.00 move we saw this month, my guess is the average trader who was long Wheat has been blown out of the water…and wants NOTHING to do with it…which IS when you want to be buying…And I know I beat this idea to death…but that IS how this game works…In every bear market, you DO reach a point, due to “fundamental” news and negative price action, where EVERYONE has become so certain the market is going lower that farmers dump everything they can stomach, and specs load up with shorts until they can realistically sell no more…until there are literally no sellers left to sell…to take new short positions…EVERYBODY is on the short side...BUT…those shorts do have to be exited, meaning that, sooner or later, those shorts do HAVE to become buyers…The resulting situation can then become explosive when grain dealers, with record orders to deliver on their books, but not yet owning the Wheat, have to, themselves, become buyers in the cash market at a time when the Specs are overwhelmingly short, and the farmers have nothing to sell at current prices…AND THE PRICE BIDS START RISING…AND THE NEXT THING YOU KNOW ALL THOSE FUNDS FIND THEMSELVES IN TROUBLE…AND BUYING…AND BUYING…AND BUYING…OFTEN PUSHING THE MARKET QUICKLY %& SHARPLY HIGHER…A perfect example of this recently occurred in the Soybean Meal trade we made earlier this year (chart following), where the funds got caught with their biggest short position ever versus a near record commercial long position.
Nothing says it has to happen in Wheat in the same way…or at all for that matter…but I will take this bet…over and over and over…I KNOW what the potential for set ups like this can be…In this game, I firmly believe that prices move more on players getting in and out of positions than anything else…especially when it comes to the funds…and the massive dollars they pour into specific markets…and then HAVE to get out of…
This market is below the cost of production...And I can assure you that every grain of wheat that analysts keep touting as bearishly "overhanging" the market has been counted a 1000 times...is a KNOWN in other words...Meanwhile, world demand is clocking in at RECORD LEVELS...And weather, a MAJOR factor in crop production, is ANYTHING but normal...both here and on the rest of the planet (June was the USA's hottest since 1897)...So I say it just makes sense to get long...and stay long. This is NOT some throwaway commodity the world does not need.
I have noted before that as this newsletter comes together… as I try to show you what influences my decisions to be long, short or out of any market…I sometimes draw new conclusions as I write…And the chart above did just that: I LOOKED AT THESE NUMBERS, AND THE TIGHT BAND IN WHICH THIS MARKET WOULD HAVE TO GO SIDEWAYS TO LOSE EVERYTHING, AND THE DISTANCE NECESSARY ON THE WRONG SIDE TO RECOUP 100%, AND THE FACT THAT I DO THINK $6.00-$6.50 IS AN EASY OBJECTIVE…AND I LITERALLY SAID OUT LOUD TO MYSELF, “INCREDIBLE”.
I THINK THIS IS AN INCREDIBLE RISK-REWARD TRADE…I MEAN IT WHEN I SAY I WON’T BE OUT OF IT.
As for other markets in which I am involved, I still want to own Eurodollar Puts (again, this is not the Eurocurrency) and still recommend being long Crude Oil…On another front, I do think it is time to be Short both Gold and Silver, looking for many years on the downside, but will leave all of those markets for another newsletter.
Two GREAT trades here…I encourage you to do something with them…ESPECIALLY if you tried them earlier this year when they did not work…One thing about trading is you cannot just crawl in a hole and quit when an idea has beaten you up. Having BEEN wrong does not mean you STILL will be wrong…And as one of my wall reminders says: ONE GOOD TRADE IS ALL IT TAKES.
GREAT TRADES…Call me if you want to do something with them.
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Treasury Bonds, Wheat, Eurodollars, Silver