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August 27, 2017

 (mistakenly originally emailed showing August 24 as the date)

A Mammoth Short

During my career, I have had far more experience in Treasury Bonds  than any other market  we trade. While it does not mean I will always be right…I’m not…I do tell myself that this is the market that I understand better than any other…and right now my “understanding” is screaming at me that Bonds are about to do what I have seen them do so many times before…and that is, surprise the living daylights out of 99% of the entire financial community.

We saw a totally surprising (to all the Wall Street geniuses) 30 point downswing in Treasuries last year…And I think we are on the dead on the edge of seeing another…

Easily 25 years ago, I started writing and describing the interest rate market as THE contrary opinion market, by which I mean that Bonds are the market in which the supposed “experts” and prognosticators were perennially more dead, dead wrong than in any other market we trade…I could write pages about the psychology of why I believe this to be true, but will simply summarize by stating that fixed income people (bankers, pension funds, insurance companies, bond portfolio managers, etc.) are inherently extremely conservative, and prone to being crowd followers…NOT independent thinkers…and therefore quite often only think and act in line with what they perceive everyone else in their industry to be doing. In other words, they are sheep, which it is ultimately dangerous in this business, and therefore my very distinct experience has been that when you can sense that they are all unanimously bleating the same opinion, is absolutely when you need to be running hard in the opposite direction…And right now, their very definite groupthink regarding rates is, “Going up slowly…but not immediately…and not by very much when they do.”

And with this and other fundamental factors in mind, I remain EXTREMELY BEARISH the Bond market and will repeat what I wrote 14 months ago...

From my June 20, 2016 Newsletter

“If you buy the 30 Treasury Bond here, you are making the assumption that inflation will remain below 2% for the next 30 years, and more importantly, you are making the assumption that there will be enough demand for a piece of paper yielding 2.4%  to keep Bond prices at or above current levels for the next 30 years…AND I THINK THOSE TWO ASSUMPTIONS ARE ABOUT AS FINANCIALLY STUPID AS IT EVER GETS...I THINK THAT BUYING BONDS HERE, AND I MEAN ANY KIND OF BOND, WOULD RANK AS ONE OF THE WORST INVESTMENT DECISIONS ANYONE COULD EVER MAKE… Really. I think bonds could be down 30-40 points within a year or two…”

And for the record…this is the sell off that has occurred since then…and is, I believe, just getting started….


So…When I wrote that, a little over a year ago, right around Brexit and the upcoming presidential election, Wall Street was loudly telling the masses how precarious everything was, and advising investors to avoid Stocks and seek safety in Bonds…which, as we now know, was VERY bad advice…But was this just a onetime “bad call” from them…or is it more accurate to simply assume that it is RARE when they ever really get it right?

And you know what I think…Anyone who actually believes that the major banks and brokerages know ANYTHING about where ANY markets are headed…AND THIS INCLUDES THE INTEREST RATE SECTOR…is blind to the reality of persistently wrong those people are…And to substantiate this, on the table below, just walk yourself through each year since 2000 and note how INACCURATE these guys REALLY are…year, after year, after year.

8-23-17strategists forecasts.png

Plainly stated, if we know that their 17 year track record is LOUSY, wouldn’t it be worthwhile to understand what they are saying now? To better anticipate what NOT to be assuming?...So here are just a few more samples of what those same brilliant “strategists” are basically saying today…And no, these headline clips don’t include everybody but I’m pretty sure they are fully representative of what ALL the Banks and Brokerages are saying…Believe me, none of them are any different than the other…


Yes, there are a few people out there who get it right at times, but generally speaking…one more time…the overwhelming majority of them are nothing but well dressed, articulate wrong-way sheep…and to be clear…They are STILL telling you to NOT buy the stock market.

And in the same vein, I would then emphasize that this tendency to be perennially wrong, or “off by miles”, does NOT just pertain to the stock market…IT APPLIES TO THE INTEREST RATE MARKETS AS WELL…and while I am certainly no trading genius, part of my ongoing record of often predicting where rates (and equities) are actually headed has stemmed from my understanding that the overwhelming majority of the supposed “logic” that comes from the pro’s ALWAYS sounds good…always QUITE logical…but is SELDOM on target…which IS definitively validated by those 17 year stats above…There ARE always bullish and bearish arguments to make about any market…but much more often than not, the one that ISN’T being heard (until the move is almost over) is the right one…which is where I think we are with Bonds and Interest Rates right now.

When you get down to it, Wall Street basically has two major paper products…Stocks and Bonds…In other words, two major products in which they can spew their FOREVER wrong forecasts…And right now, my read is that 95% of their opinions are unquestionably, “Stocks will fall from here” AND “Rates are only going up a little, if at all, in the next year.” And I say that have got it, quite typically, totally backwards…

 I continue to see Stocks moving sharply higher and Bonds moving sharply lower

GET SHORT THE BOND MARKET. Do not forget that during the past few years…and especially last year with its revolving door of supposed crises...a MOUNTAIN of money has shifted into the “safety” of bonds, AT THE ALL TIME HIGHS, which is truly beyond comprehension (chart following)…Investors DO get in and out of specific markets and what all those funds in bonds DO now represent are future MASSIVE liquidations that I firmly believe WILL eventually place, in distress, at much lower levels. Think about it. Can you realistically say that Bonds still have any upside? That for the next year or two, much less for the next 10 or 20, is there ANY way rates could stay at these record low levels? For sure, if the US and world economies TOTALLY fell off a cliff…like Great Recession proportions…you could possibly get Bonds back to their highs…But I say that is NOT going to happen…that the Great Recession was a once-every-fifty-years thing and another one is NOT just around the corner…

The point is, in my opinion, Bonds ONLY have downside potential from here…with 25-30 points being an ultra-minimum objective…and I therefore think, if you ever speculate on anything, it is folly to NOT be short here. This IS going to happen. And the public, which has been fear-fed into buying, and buying, and buying bonds & bond funds for the past few years…while at the same time they were selling stocks, is going to get shafted, AGAIN, by the fat cats in New York…and as I wrote several days ago, the public’s liquidations, and staggering losses of principal, will be a BIG story sometime in the not too distant future.

The following chart presents a great picture of where the investing masses, following Wall  Streets “guidance”, have been moving their money…


And be sure to note what has been going on since early 2009…that since the crash, the Dow has rallied 300% while public money inflows have barely changed…but inflows into Bond Funds have almost tripled…

And just to put all that buying into perspective?


Here is a century long perspective as to how low rates actually are…And, one more time, to Buy Bonds Here is a bet that rates will STAY down here…for DECADES…which I would offer, is NOT a smart move to be making.



How Bonds stop dead…and go DOWN…

Since 1981, I count 11 truly bearish phases that have taken place in Bonds since 1981 and can tell you that there are often very distinct similarities in how those bearish moves begin…with the most common being a long sideways trade that ends with one last surge up to the recent highs…and then dies, literally, from one day to the next…on no particular news at all…and then goes relatively straight down. And today’s market looks VERY much like many of those previous bearish set ups…

Here are a few examples…followed by what today’s Bond market looks like…Decide for yourself if there are similarities.

Note how these contracts were trading sideways to higher…and then when they stopped...they STOPPED DEAD and started falling…And again, I assure you, at none of those sell points would you have heard ANYBODY in the media saying, “Sell here!”, nor would there have been some particular new event that said the same. Quite the contrary…








And here is what we look like today…Like I said above…Decide for yourself if there are similarities to previous tops…


Interestingly, I can find no period in the history of Treasury Bond futures in which a consolidation like we’ve had for the past 9 months WASN’T followed by AT LEAST a 10 point move, one way or the other…which definitely makes a very strong argument for SOMETHING big happening here…and I DON’T think it will be on the upside.

There are various approaches that can be taken here…

Here is the 1 & 1…which is always smart…especially when the odds are so high that this contact WILL move…


 A final realization as I reached the end of this piece…

I’m going to say that I think it is impossible (which is not a term I would use loosely in this business) for Bonds to stay at these levels…

And also that I consider the odds to be SKY HIGH that, quite soon, or later, we are going to see  a typical 20-30 point downside move within a just-as-typical  3 to 4 month timeframe.

With this EXTREMELY firm opinion in mind, this leads me to conclude that it is worth it to own $1000-$2000 puts until this DOES happen, as, from a mathematical standpoint, if you do have to lose as much as 2 or 3 times…but are able to own options that I fully believe will be worth $20,000-$30,000 when this DOES happen, it DOES make sense to fund this idea until it DOES work. And I may be dead wrong, interminably, which could mean losing 100% on every option you ever buy, but I absolutely 150% think that this will happen…that this WILL work…and realistically speaking…NOT in the too distant future.

As I just put that last thought into print (leading to my comment at the top of this newsletter), I then sat back and said out loud to myself, “This is f***ing TRUE. This is TRUE. All you have to do is execute the plan. This IS going to happen. Just be there. Stay there. Execute the plan and it can be a grand slam.” AND THAT IS ABSOLUTELY CORRECT. I SAY THERE IS NO, NO, NO WAY THAT BONDS STAY UP HERE. AND THERE IS NO, NO, NO WAY THAT THEY TRADE FOREVER SIDEWAYS…AND THAT THEN ONLY LEAVES ONE OTHER POSSIBILITY….DOWN.

…Which makes this one way bet following, the December 152 put, extremely attractive as the place to be until year’s end…with the understanding that if it does not produce a winner, it will only mean the market is still at current levels, or higher, and therefore, the bet is still there to be made, with ANOTHER $1200 put…with another 3 months of time.


And one final brief look at the Eurodollar market, for which I really have nothing much to add to everything that I have written since last year…

One – The June contract below still assumes there will be only one 1/4% rate increase in the course of the next 10 months. I think this is ludicrous.

Two – The fact that this contract, which IS in a downtrend, bounced in March and has been sideways since April, does NOT mean Eurodollars have made a truly bullish turn…As stated in previous letters, markets do two things: move and consolidate…and I firmly believe we are about to MOVE…and it WILL be down.

Three – The fact that this trade was working…and then stopped working…has been painful, but meaningless as to what comes next.

Sometimes this business is just a question of hanging in there…and not giving up, psychologically or financially. This market is about to go down again…HARD…That is just my opinion, and I might be dead wrong, but I am just as strong in my belief as I have been for the entirety of this year.

I would definitely recommend buying this June 2018 Eurodollar put in combination with the December 152 Treasury Bond put…with something like units of 5 Eurodollars ($1155) and 1 Treasury Bond ($1201) for a total cost of $2356. Go back to the charts and do the math yourself for what the results might be dollarwise.


And one more time, the fact that this has not worked (or did so only temporarily), does have NOTHING to do with what we are going to see next. Being wrong is part of this game…

Give me a call and let me know what YOU think?





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, Eurodollars

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