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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 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....
Bill Rhyne
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