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September 1, 2008
I've punched this out tonight, at the end of
a holiday weekend and am sending this pretty much unedited.
Please excuse any rough edges...
Buy Treasury Bonds
I remain extremely bullish the
bond market...Here are a few reasons...If I
let myself, I could probably pound out 20 pages on this subject,
but know, understandably, no one would read it.
Bonds do move,
typically in 10-15 point swings ($10,000 to $15,000 per futures
contract), and they have been sitting here sideways for almost a
year. As futures are inherently volatile, sideways is never a
permanent condition, and the most interesting and potentially
dynamic set up I like is a market that has "gone nowhere" for a
long time. Bonds are, I believe, ready to go somewhere...and
everything I see suggests it will soon be on the
upside, with a target somewhere in the 128-130 area.
Inflation is the #1 enemy of the bond market.
If for example, you have 6% inflation and a Bond is only paying
5% interest, you are losing money...However, we have
just been through the worst inflation in over 20 years, and
you'll note on the chart following, Bonds "should" have gone in
the tank, but in reality, did nothing but go sideways.
To me, the fact they did not collapse (and in
fact are now right at their contract highs) is indicative of the
underlying strength of this market...Give bonds ANY reason to go
up and I think they could go nuts...And one of those reasons
might now be that all of those bullish commodity markets are now
beginning what well may be precipitous declines, that led by the
continuing decline in Real Estate prices, deflation could become
an even greater worry than inflation ever was...I could rant
about this at length but will just leave it at saying I think
prices at the producer and consumer levels have peaked and the
inflation figures going forward will be dramatically bullish for
the Bond market.
For the past year, as the dollar was steadily
falling, you certainly heard the innumerable "expert" references
to, "If foreign buyers totally lose confidence in the dollar,
they might dump all the US Treasury Bonds they own and our rates
will go screaming higher!"...Well, in spite of all that drivel,
nothing of the sort happened. The Dollar did keep
falling, making louder and louder headlines, and analysts kept
warning about owning Treasuries, but again, the bond market
never budged to the downside...and if you followed
their advice and sold US Treasuries, today you'd be losing
money.
I believe there is no safer long
term financial instrument on this planet than United States
Treasury Bonds. Talk all you want about the USA
losing its international economic dominance (I totally
disagree), but our financial paper is, in the end, what
international investors want when it comes to crunch
time...Think about it. Every time there is some sort of
international crisis, that phrase, "flight to quality", appears
everywhere in the financial media, and what does it seemingly
always refer to?...US Treasury Bonds...For a market
go down, you need more sellers than buyers. In today's world,
with political, economic and stock market turmoil/uncertainty
around the globe, I believe there are hoards of ready buyers for
our paper...And, in reality, I don't think ANYONE
in the fixed income world is even remotely interested in
actually selling, i.e., getting rid of, US long term paper. They
can yap about selling all they want...but they don't actually do
it.
I certainly do not know but I suspect the
housing situation has not yet inflicted its worst pain on the
economy. I see a good deal of opinion that the economy has
"absorbed" the real estate hit but find it hard to agree. I
don't think much has changed since I wrote the following back in
May:
"I have NO idea as to how far the whole
housing debacle will extend but when I see developments full
of brand new (year old) totally finished houses with prices
already whacked 10-15% and zero traffic looking at them, I
can't help but expect real estate prices can do anything but
continue to fall...There's one example right down the street
from me...$500,000 homes that were finished last summer, 13
of them occupied and 28 still sitting there empty. It's late
spring, they've lowered prices by $30,000 to $50,000 a unit
and the place is still like a ghost town, not even an agent
on the premises. Maybe I'm wrong, but my guess is easily 25
of them will still be unsold come winter when the housing
market dies for the year...and those houses won't have a
chance to get moved until 2009 when they'll be probably be
priced deep in the 300's..."
Even though I know there must be a lot of
pent up demand in the residential market (prospective buyers
having to sell their own homes, it's been difficult for anyone
to move for quite some time now), three months later that
development has sold exactly two homes, leaving 26 out of an
original 41 still empty. They are all quite nice houses, long
finished all the way down to landscaping...but they are not
moving...and as we now head towards winter I can't imagine what
is going suddenly see them start selling...Kennesaw, Georgia is
not the world, but I would think to some worthwhile degree it
is an average representation of what is the case all over this
country...The bottom line is, the just updated chart of the
Case-Shiller Housing Price Index below hasn't shown any sign of
stabilizing, and with what I believe will be continuing
excessively massive inventories out there (similar to my
neighborhood example), I don't see why this should change.
Maybe I'm wrong but I would guess there is much more
housing price depreciation on the way, and with it,
more consumer pain as millions of home owners find themselves
owing more on their mortgages or home equity loans than their
houses are worth...My general optimistic nature argues against
what I think is coming, but I can't get past the idea
that all those inventories are NOT going to move at anywhere
near their current prices and that there's a psychological
negative price snowball rolling that, at the earliest, won't be
even begin to slow down until next spring...And with it, hard as
it may be to believe, all the bad bank news out there is FAR
from over...and I guess the downward pressure on the stock
market as well.
DEFLATION SHOULD BE MORE OF A WORRY THAT INFLATION?
THE BOTTOM LINE IS I DON'T SEE HOW IN HELL
ANYONE SHOULD BE EXPECTING ANYTHING LESS THAN SHARPLY LOWER LONG
TERM INTEREST RATES. MAYBE I'M WACKO BUT I SEE THE 30 YEAR
TREASURY BOND, CURRENTLY YIELDING 4.41 %, GETTING AS LOW, AT
LEAST, AS 3.75% WITHIN THE NEXT 6-9 MONTHS...AND AS I SAID AT
THE BEGINNING OF THIS TOO LONG HARANGUE, TREASURY BOND FUTURES
WILL THEN BE, AT LEAST, SOMEWHERE IN THE 130 AREA..
I want to be all over the
Bond market on the upside. With them sitting here on the old
highs, they are in the perfect place to put on "units" of two
calls to every put, in that, from here, my guess is they either
take off somewhat vertically...or they get rejected, and fall
off the 5 or so points probably necessary to recoup 100% of what
it would cost to own each unit.
Still Shorting the Soybean Complex
Especially Soybean Oil
Quite understandably, it looks like the Corn,
Wheat and Soybean markets all needed to "bounce" a bit for the
past few weeks as there has been a lot of talk about, "What if
it doesn't rain in the mid-west?" or "What if we get an early
(crop killing) frost?", implying that all of these markets could
go shooting off into the stratosphere again. I've bought in to
that sort of stuff more times than I'd care to admit (and lost
money) and am sticking with the idea there are MASSIVE crops out
there, we are still headed hell bent for harvest, and
I believe there is no way Soybean farmers are going to
driving up to their local elevator in November and be handed
anything close to today's $13.50 a bushel price...I
am sure there are people looking at the way these markets have
dropped and are thinking, "They MUST be a buy", but I'll go
back, one more time to my example of wheat earlier this
year...In May, Chicago Wheat was trading at over $13 a bushel
and the story was it would never stop climbing. In general, with
sentiment so crazy bullish, farmers didn't lock in those prices
when they could in May, and two months later, at harvest, as
they all came out of the fields, when most of that wheat had
to then be sold...and they ended up taking $7.50...I think it
will be the same with Soybeans and Corn come their respective
biggest harvest months of November and December.
As I still see Soybean Oil as the
most inflated part of the soybean complex, this is the market I
am sticking with as my primary vehicle...I still expect to see
it, minimally, in the low 40's and see this most recent 4-5 cent
rally as an opportunity to establish new short positions.
Still Shorting the Cattle Markets
Cattle are still near record highs. I've been
longwinded enough already so all I'll say is I don't
think the current economy will support even higher beef prices
than we have now, and cattle prices have nowhere to go but
lower, and perhaps very sharply so, over the next six to nine
months...I'll also add that all year I have seen
nothing but bullish, bullish fundamentals being cited in the
cattle market, both as to supply and demand, and suspect that
this ultra bullish sentiment has led to a situation where there
are many more animals, and maybe a lot weaker demand, than most
people in the business are anticipating...and the end result
will be one of those "endless" sell offs that are so almost
common in the meat markets.
Still See Crude Oil Sliding
I know there must be legions of speculators
thinking, "That crude is going to rally big from somewhere in
here", but I suspect the quite the opposite may be coming...that
the roughly $35 totally unexpected sell off (think back to how
nutso bullish everything was just one month ago), after a brief
recent pause, is about to accelerate again on the downside. Here
we've had several hurricane scares,
with the Russian invasion business in Georgia, and still Crude
has stayed on the soft side when six months ago this market
would have been rallying $5-$6 a day? I think the
lack of upside moves maybe speaks volumes about the inherent
weakness of this severely overpriced and speculatively inflated
market...and still think the first real stop could be under
$90...
I never forget that the futures
markets are constantly swinging between extremes and are never
at equilibrium (I don't care what any analyst comes
up with. I don't think there is a "fair" or specific value for
anything in the futures markets).Those extremes can exist in
price, such as Crude's last blast straight up from $90 to $147
(a 50% increase!) and/or in emotion, where, as it was just a
month ago, we had some supposed geniuses talking about $8.00
gasoline (!)...My point is, this sell off in crude has taken
place fairly "quietly", and my feeling is we have not even begun
to approach the next extreme, that of the BEARISH variety where
the whole analytical world loudly declares, and certainly with a
host of supposedly sound fundamental reasoning, "We've changed
our minds! It's headed for $50!!!".
But who knows about any of this?
To some extent, luck has been with me for a while, but you can
be assured, as strong as my opinions may be, I do know that I
don't know...More than anything, succeeding in these markets is
more about risk management and being able to stay in the game
when you are wrong (which you are often going to be), which is
why I'm always preaching in favor of the so ineloquently named,
"2 and1", thus enabling you, when you are lucky
enough to be right (which sometimes we are) to actually make
some money, which, as a function of the ridiculous leverage of
futures, can occasionally result in truly "giddy" type
percentage gains.
Give me a call if any of this interests you,
or if you have ideas of your own you'd like to explore...
Thanks,
Bill
866-578-1001
770-425-7241
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