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Oct. 14, 2005
Buy Treasury Bonds
On October 7th, I recommended buying the Treasury Bond market
using "units" of 2 December 115 calls and 1 December 114 put.
The bond market went down this week, and, thanks to the increase
in the value of our puts, we were able to liquidate those units
today with an average loss of $54.00. Going into today's close,
we then reinstated our long position now using units of 2
December 113 calls with 1 December 112 put as "insurance" with a
total cost of about $3200. I am not a glutton for punishment (I
can handle a lot of $54 losses), but am simply firm
in my belief the Bond market is now set to rally, potentially
very sharply.
INFLATION (!) talk was all over the media this week,
with the implication being Bonds could only be going down, as
long term rates go up. We ARE trading the futures market, not
the past, and in my opinion, we have seen the worst in
inflation. Yes, there may be some few more months of higher
inflation numbers (or maybe not) but if so, with everybody
hopped up on the subject, those numbers have surely been
accounted for by the markets. Yes, Oil has
generated some inflationary pressures, but I do not believe we
have entered an era where inflation is systemic. In other words,
we have not reached the point where the general public is in any
way thinking, "I need to buy this now. It will only cost me more
later.", nor, more importantly, do you have employees demanding
higher wages to keep up with the increased cost of living... On
the contrary, they are just more concerned with holding on to
their jobs....Yes, I am paying more for energy, but a trip to
the grocery store, the movies, the mall or the big box stores
still seems to cost the same....And with all the talk about the
Fed continuing to raise short term rates, one should not forget
they have been doing so for some sixteen months now, and in
general, the Bond market has responded positively to that
tightening...
I think Treasury Bonds are going up because the world
still has a tremendous appetite for long term paper guaranteed
by the United States Treasury...And I still say no one is really
interesting in selling any of that paper they already own.
I am still a buyer and continue to look for a
"typical" 10-12 point Treasury Bond rally over the next 3-4
months.
Sell/Short Gold
With all the hoopla about inflation, Gold still
closed about $7.00 lower this week. For many of the
same reasons I am bullish on Bonds, I am bearish on Gold.
This is a 4 year old bull market that I believe recently reached
its emotional peak. I suppose they are out there, but I don't
seem to see ANY commentary that suggests gold could be headed
down, at least beyond a "minor correction"....and as I pointed
out last week, speculative traders are VERY, VERY long this
market (with a net change of almost +10,000 longs in the last
week)....Maybe I'm wrong, but I continue to believe
the next move in gold is potentially a very nasty liquidation of
all those specs and prices will drop anywhere from $40 to $60 in
a very short period of time.
I am still buying puts and selling futures in the
December 2005 and February 2006 contracts.
Sell Copper
MAYBE....Copper closed down about 5 cents this week and MAYBE
the top is in. As I said last week, I'd just about given up on
this idea which then led me to think the end of the bull market
must be close. I continue to recommend selling futures or buying
puts in this market and would refer you to our April 12
newsletter
http://www.crokerrhyne.com/newsletters/04-12-05.htm with examples
of how steep the sell-off's have been in the past (and from much
lower prices) when Copper finally does top out...
Buy Cotton
Cotton closed up 3.30 cents this week and I strongly
believe it is in the early stages of lifting off from the bottom
it has formed over the past 15 months. To repeat
from last week's letter, Cotton has spent roughly 90+% of the
last 30 years at prices substantially above current levels.
I see Cotton as the most undervalued commodity on the board with
worldwide demand seems to be going nowhere but up. Yes, we have
a big crop in the fields, but growing world population/demand
for just about any commodity you want to name means record crop
production is a necessity...In fact, I have yet to see a
commodity bottom that wasn't accompanied by having mountains of
that commodity all over the place.
I am VERY bullish this market and expect to see it at
least 25-30 cents higher by some time next summer. I am buying
futures and call options on both the December 2005 and March
2006 contracts.
Give me a call if you are interested in any of this....
Thanks,
Bill Rhyne
800-578-1001
770-514-1993
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