July 22, 2019
Buy March 2020 Eurodollar Puts
Perceptions about commodities, stocks and the economy can and do change dramatically in very short periods of time…Just using the Dow as one example, look at the swings we’ve seen during the past 8 months…Dropping 4000 points in December, 2018…then back up 4600 points 2 months later…shortly thereafter falling 2000 points in 1 month…and most recently, back up again with a 2700 point rally in just 6 weeks…
And coincident with those swings, you can bet that the media’s perceptions regarding stocks and the economy were swinging just as dramatically from bullish to bearish, and back again in the opposite direction, and then back again…at virtually every turn up or down that the Dow was making…as in, “The economy is strong!”, then, “No wait, the economy is weak!” and then, “No wait again! It’s getting better!”, etc.
And along with all those swings in stocks, perceptions in other markets are dramatically affected as well…one of those being interest rates, where generally speaking, perceptions shift between, “Rates are going higher!”, and “Fed needs to ease!”
In my opinion, expressed at length last week, Wall Street’s perceptions currently lean overwhelmingly towards the idea of a “slowing” or “fragile” economy…and as a consequence, the financial media is now packed with opinions that, “Rates have to go lower”, to the extent that the futures markets have already built in almost a 1/2% drop in interest rates between now and next March…
Plainly stated, my very strong opinion is that between now and 8 months in the future…or March, 2018…this popular perception of a “fragile” economy will have totally lost any validity…and that the media will have forcefully shifted towards something more like, “This could be the strongest economy we have had in years!”
And as a consequence, the currently in vogue idea of lower interest rates will have been dramatically reversed in the interest rate markets.
Yes, the Fed might lower rates once at their upcoming July meeting, but if they do, I maintain that it will be last time they lower rates for YEARS to come…I continue to believe that rates are going decidedly higher from here…and continue to recommend being short the Eurodollar market.
A little mathematical perspective: If the Fed cuts rates by 1/2% between now and March, only then will this contract still be at 98.25...Any cuts less than that, and the market WILL be below current levels...and especially so, if, going forward the news becomes, “Hey, the economy is quite strong!”, or “Inflation is beginning to heat up.”, in which case, the Fed easily could begin shifting towards a policy of interest rate raises...And again, this is just my opinion, but I do think that this is what we are going to see…
Call me if you think this makes sense and want to talk about it…
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: Eurodollars