July 16, 2016
There ARE a few analysts I do not consistently disagree with…and one of the best I know has stated the following: The objective of forecasting is to identify the significant but undiscounted aspects of the outlook. This is where the true opportunities for investors lie…A rehash of the consensus view, which is fully discounted in security markets and business plans, is nearly useless.
I don’t think you’ll ever find a more relevant statement with respect to how the seeming majority of brokerage house analysts and economists are currently appraising the future of stocks, the economy, and particularly, interest rates…Five years ago, if anyone had suggested the idea of zero or negative interest rates, they would have been laughed off the planet. Today, however, you have DROVES of analysts yapping about the “need” for rates “to stay at ultra low levels” here in the USA, or even possibly match the zero/negative levels that a few countries have recently moved to..And to put it bluntly, I consider those opinions to be just about as STUPID as it EVER gets in this business.
For several decades I have written that the interest rate markets are more full of bleating sheep analysts than ANY other market we trade…Without going into great detail, I would offer that this propensity to perennially follow the crowd…in the WRONG direction…is based in the fundamental nature of the average bond portfolio manager’s DNA, which is essentially that of a banker…Meaning, they are overwhelmingly conservative and prone to only act on anything when they KNOW they are doing what everyone else is doing...that they NEVER “go against the crowd”…and that they are inherently NOT independent in their decision making. Before they make a move, they want to read a 100 times that their peers agree with them…And this sheep’s mentality has led to their having been heavily opinionated, and positioned, DEAD WRONG, at ALL the major turns in the interest rate markets I have seen during the past 30 odd years…And right now, they are now ALL on the “Rates GOTTA stay low” bandwagon, their general “logic” being based in the idea that the economy is on shaky ground…not to mention the nonsense about Brexit bringing the world economy down…or that trite, but never accurate, expression, “We are in an election year and the markets don’t like uncertainty.’…And one more time, you have no idea how financially ignorant I think all of that sounds.
On a similar note, if all you had to do was read the headlines and follow them, investing in anything would be easy. But it’s not. It doesn’t work that way…When you get down to it, all of the information provided by the media (especially the yakheads) does nothing more than report on the present…and the past…but investing or speculating involves predicting the future…NOT just yapping excitedly about what HAS happened, well after the fact…
So here is a bit of my vision for the future…my opinion of what some headlines will be at year’s end:
“3rd and 4th quarter GDP for 2016 surprised economists by growing 3.5%.”
“With the Dow having EASILY surpassed the 20,000 mark, surprised analysts are now REVISING their stock market forecasts.”
“With Inflation now running at a 2.8% rate (lead by higher housing, health and energy prices AND widespread wage increases), analysts NOW understand why interest rates have been rising since July.”
Ok…So none of these numbers have been “scientifically” determined but I do think they are all potentially decent ball park guesses…the underlying points being, THE ECONOMY IS GETTING MUCH STRONGER, STOCKS ARE GOING DECIDEDLY HIGHER, AND WE WILL SEE (ARE SEEING) A JUMP IN INFLATION…AND IF MY GUESSES ARE EVEN CLOSE TO BEING CORRECT, YOU’D BETTER BELIEVE THAT INTEREST RATES, BY THE END OF THIS YEAR, WILL HAVE MOVED UP…AND ALMOST CERTAINLY A LOT MORE THAN ANY OF THOSE FOREVER WRONG “ANALYST” BOOBS WOULD EVER HAVE BELIEVED.
SO…I CONTINUE TO BUY EURODOLLAR PUTS.
I THINK SHORT TERM INTEREST RATES ARE ALREADY ON THE MOVE HIGHER.
Again, this is not the Eurocurrency, not does it have anything to do with Europe. Eurodollars (the most heavily traded futures contract in the world) are Dollars on deposit in banks outside the United States, and the Eurodollar futures contract directly reflects the interest rate paid, or charged, for those Dollars.
Specifically stated…THE EURODOLLAR CONTRACT DIRECTLY CORRELATES WITH INTERNATIONAL SHORT TERM INTEREST RATES. WHEN 90 DAY INTEREST RATES ARE FALLING, EURODOLLARS FUTURES GO UP…AND WHEN THOSE RATES ARE RISING, EURODOLLAR FUTURES GO DOWN.
Here is a note that I recently wrote to myself: IF MY PERCEPTIONS OF STOCKS, THE ECONOMY AND INFLATION ARE CORRECT, THERE IS A FORTUNE TO BE MADE IN EURODOLLAR PUTS. THE RISK-REWARD NEVER GETS ANY BETTER THAN THIS.
First up…I wrote that thought to myself…but now I have put it in front of you…and any time I talk about making a “fortune” in the markets, I am obligated to also clearly state that I might be dead wrong…in which case, you could lose every dollar you have on the table…BUT…the fact is, I DO see this as monster leverage, with the potential for EXTREMELY high profit potential, and I DO consider the probability of being wrong as VERY low…all of which, as a trader, inspires me towards an attitude that probably is as aggressive as I ever get…But again, this is just my own, personal trading perspective…and I may be dead, dead wrong.
Why do I like this idea so much?
One: This is the most liquid futures contract in the world…meaning you can EASILY take positions with a year (or more) of time…at what I believe are astoundingly low prices…Some of you have heard for years that I believe the best way to trade is to buy a ton of time, then “go to South America” (as I did with $1.50 Corn in 1987), and, “not even consider checking on the trade until 6 months later.” THAT IS EXACTLY HOW I FEEL ABOUT THIS IDEA.
Two: Because the mob psychology groupthink is so SURE that rates will be staying ultra low, the June 2017 Eurodollar contract currently only projects a less than ¼ % rise in short term rates during the next 11 months…and I have to say that again…The June 2017 Eurodollar contract currently only projects a less than ¼ % rise in short term rates…DURING THE NEXT 11 MONTHS…And you have no idea how absurd that seems to me, BUT, that IS the way this IRRATIONAL game gets played, and thanks to the herd mentality nature of the markets, I SEE THIS AS HAVING PROVIDED ME WITH AN INCREDIBLE OPPORTUNITY…and that is not just some off the cuff remark. I think this is BIG.
Three: I SEE PUT OPTIONS, WITH ALMOST A FULL YEAR OF TIME, AS HAVING MORE LEVERAGE…AGAIN, FOR A FULL YEAR…THAN ANYTHING I HAVE EVER SEEN IN THIS BUSINESS.
Enough talk…except for one excerpt from a recent newsletter…as by now, you either see this as I do…or you don’t…
I will repeat that I think all you have to do is look out your window to see that THE ECONOMY IS HOPPING. Construction is everywhere. Vehicle sales are booming. Housing prices are rising. Everybody is out driving, spending and consuming. The airports are so crowded it feels like you are walking into a stadium with 100,000 other people for the Super Bowl. “Now Hiring” signs are everywhere. Energy prices are low (but rising I think) and money (economic “grease”) is cheap as dirt…Really. They can talk all they want about the economy not being “good enough”, or that China is slowing, or that Europe is busting up…or God knows what else all the glass-is-empty “experts” will come up with…but I BELIEVE WE ARE IN THE EARLY STAGES OF AN OUTRIGHT BOOM…AND INTEREST RATES HAVE NO WHERE TO GO FROM HERE, BUT UP.
And once again, I encourage you to totally discard the economic negativity the talking heads and brokerage houses have been, and still are, spewing…Those guys RARELY get it even close to right…and following their cumulative “logic” is just asking to be on the wrong side of happening…And just as a reminder, with the stock market now lifting off into new all time highs, here are some recaps (from previous newsletters) of the horrible advice they have been providing during the past few months.
So they have all basically been saying “SELL!” for months...
REALLY!!!!???? You’ve had practically every major brokerage house or bank telling you how bad everything is, and that you should be selling, not buying…BUT… the Dow is now at 18,500, and I do believe, headed, in a hurry, for BEYOND the 20,000 mark…And with this in mind, and everything else I’ve presented here, if you DON’T see where I am coming from…if you have the risk capital and don’t want to make this trade, I’d suggest you are wasting your time to ever read anything else I write…And yes, that is a strong statement, but that is who I am. I CALL IT THE WAY I SEE IT. I DON’T THINK IT GETS ANY BETTER THAN THIS. INTEREST RATES ARE GOING UP. THERE IS NO REASON FOR THEM TO STILL BE WHERE THEY ARE.
Here are the charts…the numbers…and what I recommend doing here…
This is a weekly chart of the June, 2017 Eurodollar contract in which I am positioning…And you can be sure that, just because it has been “steadily” climbing on the upside for the past three years does NOT mean it can’t QUICKLY be back at 98.00…Right now, I’d say that ANY further whiff of inflation or a strengthening economy (and I firmly believe BOTH of those are already appearing), could easily produce a result quite similar to that 200 point drop we saw in 2013.
And the following chart, with my depiction as to what I honestly think is coming, is what I personally am in this trade for…And yes, these are big numbers but they are NOT pie-in-the-sky dreaming…As always, I absolutely suggest you go back to the long term monthly chart above and decide for yourself if 98.00 looks like a big move from here.
THIS CHART, AND THESE NUMBERS, ARE WHY I AM AGGRESSIVELY POSITIONING IN THIS TRADE…PER MY OPINION AS TO WHERE THIS MARKET IS MINIMALLY HEADED, I WILL SAY THIS IS MORE LEVERAGE THAN I HAVE SEEN IN A LONG, LONG, LONG TIME…AND WITH OVER 11 MONTHS FOR IT TO HAPPEN…? I AM ON THIS…
One last thought…To repeat, this is the most heavily traded futures contract in the world…And the billions of real, business related dollars that are traded daily in it have virtually always meant that this market moves AHEAD of the Fed…the point being, the odds are strong that INTEREST RATES WILL START MOVING UP, MEANING THIS MARKET WILL START MOVING DOWN, LONG BEFORE THE FED “OFFICIALLY” DOES.
Pick up the phone and call me…and do SOMETHING with this.
The author of this piece currently trades for his own account and has a financial interest in the following derivative product mentioned within: Eurodollars