October 9, 2019
I continue to see them heading higher…
In spite of what you are hearing everywhere,
I say, Higher, not lower, Rates are coming…
My impression is you would have to be virtually deaf to the media to not have noticed that what seems to be an overwhelming majority of Wall Street’s analysts, “strategists” and economists who appear to be virtually certain we’re headed for a recession…And hand in hand with their dire predictions are calls for zero to negative interest rates and their ongoing advisories to be prepared for a sinking stock market.
Really, the current environment feels, in my opinion, like the same “Don’t buy it here” mentality Wall Street has been intermittently been preaching for the past 9 years as stocks have more or less quadrupled…
My point is, if all of those people are…en masse…going to be right about an impending recession, or a substantial sell off in stocks, we will be seeing something that I honestly have not seen in my 39 year career doing this…and that would be seeing a whole herd of analysts actually call the top in both stocks and the economy.
Facts are facts, and believe me, just because you have been classified as a “strategist” by a bank or brokerage house does not mean that you will be proficient at predicting the stock market, which, in fact, is demonstrated by the followed table of data compiled by the Wall Street Journal.
Wall Street Strategists S&P 500 Price Targets Since 2000
(their average predictions and how accurate they were)
Source: Wall Street Journal
For sure, as can be noted in the last column, there are
few years when they came “close”, but overall? NOT statistically encouraging
if you are thinking,
In fact, There were 7 negative or flat years…They predicted NONE of them.
In fact, there were 8 (of 19) years where they missed by double digit percentages.
In fact, there were 12 up years…They underestimated the percent gain in 11 of them.
And the point is…
In my opinion, there is currently one MAJOR theme being unceasingly floated by many of those very same people, and that is, “The Recession IS coming”, and to reiterate, this suggests, according to them, that investors should therefore be betting on lower interest rates (BUYING BONDS and EURODOLLARS) and Selling the Stock Market…both of which, I believe, are just as backwards as you can get.
I CONTINUE TO BELIEVE WE ARE IN AN ULTRA STRONG ECONOMY AND CONTINUE TO RECOMMEND BUYING THE STOCK MARKET AND SHORTING TREASURY BONDS AND EURODOLLARS…
Here’s a 20 year view of the logarithmic Dow chart I have been showing you for years…
Here’s the shorter term view…
Really…Of course any market can stop on a dime…but do either of these Dow Jones (supposed barometer of the economic future) charts seem to be suggesting, “Recession coming?”
As always, I might be dead, dead wrong, but my recommendation is to fade all the negativity and continue to look for a stronger economy and higher stock prices.
And to be clear…
If we do get higher stocks and a surging economy,
I think that interest rates will be HIGHER,
by the time we get to next Spring…
I continue to think that, in spite of the trade war…with the stock market on its highs, and with the roads, malls, and airports jampacked with people…and construction appearing everywhere…that the United States economy is in the early stages of an outright boom…and that as the trade war begins to cease (as it MUST…It DOES have an end), there is no telling how hot stocks and the economy could get…With this in mind, I think it is easily possible that as each week or month goes by, the realization will set in that we are absolutely NOT in a slowdown…and the idea of staying at the lowest rates in modern history will go totally out the market window…AND…We will see rates doing nothing but rising.
Eurodollars and Treasury Bonds go down when interest rates are rising…And that is precisely what I think we are ALREADY beginning to see…
I continue to recommend buying Puts, and Selling Futures, in March, 2020 Eurodollars
Eurodollar futures reflect short term (90 day) interest rates and are based on LIBOR (London Interbank Offered Rate), which is a benchmark rate that major banks use to lend to one another internationally…Here in the USA, and globally, the majority of short term loans are directly tied to LIBOR, as in, for example, “The interest rate for this loan will be LIBOR +2%.”
And as I always have to point out, Eurodollar contracts decline as interest rates go higher…
And it is HIGHLY important to understand that where a futures contract is 9 months out in the future IS nothing but a perception generated by opinions among analysts, economists, and the media…And in fact, the reason that all of the markets go up and down, sometimes quite dramatically, is that current perceptions quite often do NOT become the reality.
Here is the current picture…which demonstrates the difference between today’s reality…and the market’s perception regarding the future.
Just the numbers as to where futures will be next June:
If interest rates DO drop .6% (basically more than two more 1/4% Fed cuts) from current levels, June Eurodollars would expire at 98.60 (their current price).
If interest rates drop 1/4% from current levels, June Eurodollars would expire at 98.25
If interest rates are remain the same, March Eurodollars would expire at 98.00
And if interest rates were to rise 1/4% (which I firmly believe is quite possible), March Eurodollars would expire at 97.75.
My bottom line is that I think that both short term (Eurodollars) and long term (Treasury Bonds) interest rates will be heading higher…and I therefore recommend being short both of these markets.
Here are the options I like at current levels…
So the question is this: Do you think…that by next June…the news will be that the economy is hot, or cold, or dead or whatever? And with any of those scenarios, do you think that short term interest rates will be at 1.4%...or even lower…or the same…or higher.
If you share my opinion regarding stocks and the economy, I would offer that these trades make sense.
And on my other front…
I continue to recommend being long
Corn, Cotton, Soybeans and Wheat
I will keep this brief…I still consider agriculture and row crops to be the most undervalued asset class on the planet. We have more or less been at or below the cost of production in all four of these markets for about 5 years now…And my recommendation is to own “units” of one call in each of them out in the March, 2020 contracts.
I will stick to mostly just charts and numbers here…except to say that I see plenty of technical evidence (rightly or wrongly) to suggest that all four of them have bottomed and are in various stages of beginning bull markets…And are doing so in a atmosphere in which the bulk of the commentary I see seems to be bearish…arguing that the we have “plenty of everything,” which is what I’ve seen at pretty much every commodity bottom we’ve had during 4 decades in this business.
Here’s the big, big picture…
This is the same recommendation I made back in late August…The strategy, approach and perspective are still the same…Only the options I would buy have changed…
And here are the options I would recommend in each market at current levels…
To buy all four options at current levels would cost $5219…My premise is that if just one of them makes a moderate move, it should could pretty close to paying for the whole trade…And on the other hand, if all four of them don’t go…if I am dead wrong…you could lose 100% of what you have invested…Obviously, there are any number of permutations as to how these markets might move and what the resulting gains or losses might be, but my basic premise is I do believe I will be right on at least some, and maybe, all of them. That being said, as ever, I might be dead wrong about everything I have surmised here.
As one of my wise old guys said when he took this 4 market position back in early September, “ I just want to see where it all is come January. Until then, I almost don’t want to know.” And I think that is a great perspective…
I’d also add that we have crop report out at 12:00 EST tomorrow that may affect the prices of all these options.
Give me a call if you want to talk about any of this…
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, Treasury Bonds, Corn, Cotton, Soybeans, Wheat.