October 16, 2014
I started writing a broader view newsletter several days ago, but was unable to finish it due to all the volatility yesterday…Much of that newsletter, on hold for a day, follows this introduction…
As noted in last night’s email, we exited our last remaining calls in Treasury Bonds yesterday morning, BUT as they are now (as I write) about 4 ½ points ($4500 per futures contract) below yesterday’s high I have recommended buying them again…I am relatively comfortable in thinking that the hordes of analysts who have been wrongly saying, “Sell Bonds”, throughout every point of this year’s 20 point rally, are now looking at yesterday’s “spike” and thinking, “OK, NOW we have finally seen the top. Sell Bonds!”, and I THINK THEY ARE STILL DEAD WRONG.
I AM BUYING TREASURY BONDS AGAIN…I SEE THEM TRADING UP INTO THE MID 150’S.
And here is the newsletter I started several days ago…
Bullish Treasury Bonds
Bullish Row Crops
(Soybeans, Corn, Wheat and Cotton)
Ok. You read it everywhere. Every day. “Interest Rates are going higher”. As is the norm, 99% of the painted faced talking heads are yapping about “when rates go back up”, when, in fact, they are on the decline. Against all their expectations, the Bond market continues to climb as long term rates continue to fall.
THE TREASURY BOND MARKET IS STILL A BUY. In fact, I think the odds have gone sky high we have finally reached that “breakout” point that doesn’t do something like, “Go up 3 points, then set back 2”. For various reasons, I think this is the real deal, that the virtually straight up move I have been expecting for quite some time is now shifting into lift off mode. In fact, the all time high in Treasury Bonds is 153 11/32, roughly 11 points from here…and I think we have a decent shot at matching that high within the next 2 to 4 months.
With this same supposition in mind, back in May, I wrote a piece titled, “Why bonds aren’t finished”, in which I pointed out that for 30 years, bull moves in Treasury bonds virtually always concluded with a MAJOR flourish, more often than not knocking off something like 5-8 points in a matter of 5-10 days…Yet, here we are in October, and even though Bonds have been going up since January (again, dead opposite the expectations of the entire analytic community), they have yet to have one these truly blistering upside explosions that I believe are routinely an aspect of this market…and about to be repeated. If you want to see these same examples from the past 30 years, and compare them to the present “look” of the Treasury Bond, the following link will take you there: http://www.crokerrhyne.com/newsletters/05-23-14.htm
Up until now, my reasons for continuing to scream, “Buy Bonds!”, have been based in my belief that US Treasuries are the safest piece of paper on the planet, and that EVERY day, worldwide, there are BILLIONS of dollars that HAVE TO BE INVESTED in some form of long term debt instrument…and with the USA’s Notes and Bonds being the highest quality fixed income paper there is, there is never any shortage of buyers for any instrument the United States Treasury has to offer…In that same vein, I would add the Baby Boom generation, that for the last two or three decades has driven consumer demand, and along with it stock prices to some extent, are now reaching ages where they are/will be more inclined to seek the assured return on Bonds as opposed to the risks inherent in owning equities...Also as I have repeatedly pointed out, inflation, the worst enemy of the bond market, has been negligible for years (in spite of multiple domestic and worldwide booms) and probably will remain so…the bottom line being, with PLENTY of demand, Bond prices could be staying at, or above, current prices for years to come…meaning we should continue to have the same “low” long term interest rates we now have as well.
Of late, however, I believe another bullish factor may have entered the bullish bond market equation…which I almost hate to suggest, since it is one of the toughest calls there is to make in this business…one of the easiest ways to look really stupid…but I always have to go with what I do think, and it is the following:
In general, I have been an economic bull since 2010 (and in other years past), and as such, have on many occasions expressed the sentiment that today’s world was all about business, not ideology…that the Technology Revolution was still just getting started… and that the fall of the Iron Curtain together with the capitalization of China (the victory of Capitalism over Communism) had added billions of consumers to the global economy, the end result being the planet would experience robust growth for years to come…And while I still believe those are the principal economic mega-factors driving the world forward, one of my personal future caveats to that rosy view has always been, “What happens when all those baby boomers get so old they are producing little within the economy, but the system still has to support them?”. What sort of outcome will the demographics of having a worldwide “excess” of old people (like myself) lead to from an economic standpoint? What will it mean when the working age labor force is forced to generate enough income and tax revenue to pay for the needs and benefits of a longer living overload of boomer retirees? It’s always been a BIG question in my mind.
I’m definitely not going to sit here and tell you, “I know”. In reality, in my musings as to the future of the world economy I have arrived at conclusions that are both quite positive (In essence, it won’t matter. The world ant farm will keep pumping ahead.) and quite negative (Life has been quite good for the last 6 or 7 decades but the next 2 or 3 could be nasty), but I’m pretty sure the answer is somewhere in between…But if “somewhere in between” is the right answer, I guess it actually balances out to “Not terrible but not as good as it has been”, which, when you get down to it, does not sound that good…Again, however, I obviously DON’T know the answer but if I’m anywhere close to being right, one of the consequences easily might be that my lifetime of a steadily higher and higher stock market is replaced by something different…that being, MAYBE, instead of having 3,4 and 5 year cycles of bull markets followed by 1 year bear phases, the pattern becomes quite the opposite; the end result then being, and I hate to even predict it because, as I said before, it’s probably one of the toughest, dumbest calls you can make in this business, that we enter a very long term bear market…In other words, you might have a generation of people who have been “trained” to believe, “Stay in stocks for the long term”, but as is the nature of the marketplace, in the end, there are often (or eventually) unpleasant, unexpected surprises awaiting you.
Like I said, I HATE even arriving at this sort of conclusion because top picking is SO difficult (as it’s been in Feeder Cattle), and also because it’s almost like betting against capitalism and 200 years of growth in the United States…IT’S STUPID…But I have no choice but to call it the way I see it…Anyway, here are a few of the “disturbing” factors that, along with just some totally unscientific gut feelings, lead me to put these bearish thoughts in print...and while I don’t write all this with the idea we are immediately looking at the all time high in the stock market, I do think the market is a sale here…which goes hand in glove with the real point here, which is:
BUY TREASURY BONDS. INTEREST RATES ARE HEADED LOWER. NOT HIGHER.
Start by taking a good slow look at this chart below of Disposable Personal Income here in the USA. The data comes from the Federal Reserve’s website. Simply stated, Disposable Income is the amount of money that households have available for spending and saving after income taxes have been accounted for. Simply stated, this statistic has recently gone negative, and though this is still just one chart, the implication is that the general masses are falling short of what they financially need to cover their expenses.
The main thing to observe here is, since 1930, EVERY time this chart as gone to (or below) zero, the economy has thereafter entered a recession (indicated by the shaded grey areas). As we are now below zero, if history holds true to form, by sometime next year the economy will have recorded two consecutive quarters of negative GDP, thereby meeting the definition of a recession, and another one of those grey areas will then be added to this chart.
No, nothing is absolute in the markets…and just because this indicator has been coincidentally correct on 10 straight occasions does not mean there is 100% probability we are about to enter another recession…but with consumer spending generally being regarded as 70% of the economy, I say this recently posted negative number is NOT a good sign.
On another front…
Though, again, nothing is absolute in the markets, a decline in commodity prices has always been one of the primary leading/coincident indicators of a coming slowdown in economic activity…which makes sense…When raw material prices are generally falling across the board, it takes no big leap of judgment to assume it is due to lack of demand, which in NOT what you get when the economy is hot…or even stable. Certainly, overproduction can come into play, thereby being a depressive factor for prices, but when I look across the board and commodities getting hit hard in so many areas, I have to assume there is more to it than just too much production…
So take a look at what we’ve been seeing in various major commodities lately and ask yourself if what you see looks “normal” for a healthy economy.
Really. Are these collapses something to just disregard? To chalk up to nothing more than market volatility? Or are they sending a signal that, for one, the production of finished goods could likely be headed in the wrong direction?
The truth is, deflation, which can have truly disastrous consequences for both economies and their respective equity markets, has become a very real international possibility. On the flip side, deflation, economic slowing and/or falling stock markets can ALL dramatically impact Treasury Bond prices on the upside…which is pretty much where I think the odds currently lay.
Briefly addressing several other quite important psychologically damaging-to-economic-activity fronts…
I can’t help but think the whole thing with ISIL is going to be getting anything but worse…They DO have the upper hand out there and I don’t see anything but bad news continuing to escalate. I have no idea where that whole situation is heading but ISIL does seem to be extremely well organized, and funded, and I really cannot imagine any scenario in which those guys just quietly take over Iraq, and surrounding territories, and everything just settles back to “normal”. The headlines are going to get worse and I DON’T think any events coming from the Middle East are going to be at all “helpful” for stocks and the world economy. There really is not telling how far ISIL will try to expand but my guess is they really have no intention of stopping at any border…It’s not too hard to imagine full blown WAR encompassing the entire Eastern Mediterranean region. NOT GOOD. Not just the usual Arab vs Israeli sort of headlines.
Ebola is here to stay. It has “escaped” the few middle-of-nowhere jungle villages it used to spring up in and is now rampaging through major cities, and though I really know nothing of the realities present there, I still have the impression the disease has gone beyond control, and due to the primitive services and conditions in Western Africa, it’s hard to imagine that it won’t be spreading its tentacles in any number of unforeseen directions. My guess is we have not even come close to seeing the last story of infected people in the North America, in South America, Europe, Asia, the Middle East…or anywhere. And in some locales, like the USA, we probably will be able to contain it. We most likely (but not definitely) will be able to stamp it out here but we won’t be able to totally manage the fear factor involved…But there also WILL be areas of the world where cases show up and they AREN’T really equipped to efficiently deal with it…and same as in Liberia, there will quite possibly be MANY areas where it also becomes uncontrollable…where entire cities are put on lock down, where no one can leave, no one can enter…For example, how well could it be “managed” in ultra densely populated India, or in any number of monster cities throughout Asia? Other parts of Africa? Or anywhere with only 3rd world literacy and financial resources? Really, with anywhere you want to think of, the economic or educational capabilities to respond will always be different. And everybody, everywhere, will be dealing with something none of them has really ever seen before. In some places they will be successful…but in many, they will not…and for this reason, I can only conclude the disease WILL continue to spread. I believe some of the hypothetical projections as to total infection possibilities coming from the scientific community and just as firmly believe this story WON’T be fading to the back pages of the media anytime soon…And with respect to the markets, my take is: IT WON’T BE ANYTHING BUT A “DOWNER” FOR THE WORLD ECONOMIC SYSTEM. I don’t know exactly what the various ramifications will be…but I can only think the resultant fear factor is going to be growing, and growing and growing…for at least a good while…and without sounding too alarmist, I absolutely think Ebola does have the capacity, at a minimum negatively impact to some degree a world economy that is already on somewhat shaky legs (European and Chinese economic weakness, Putin and Ukraine, the Middle East in general?)…and though I’ve seen optimistic comments regarding Ebola like, “In the rearview by Thanksgiving”, I just don’t see it…I don’t see the scary headlines getting smaller anytime soon and I don’t think we can even begin to understand where, how and how much this potentially true “crisis” will affect any number of commercial sectors. This IS different from AIDS, or SARS. Or Bird Flu…We have not seen anything like this before…not outside of those few jungle villages at any rate.
And here is one other factor of concern…
What follows is another big picture sort of chart from the Fed I’ve been wondering about for several years now…The Civilian Labor Force Participation Rate, which is defined as the "share of the population 16 years and older working or seeking work."
I honestly don’t know if this is significant, or just an economically meaningless demographic, but the fact is the percentage of the US population who are working pretty much peaked in 1990 and begin to decline in 2000, and just recently hit new lows, is thought provoking. These are not just “voodoo” economic stats. This is real, and for whatever reason it is happening, it’s hard to see this as a long term positive, in that it implies more people being left by the wayside, no matter whether our economy is contracting…OR expanding…And this kind of goes hand in glove with my earlier points about too few people working to support too many people who AREN’T working, either through retirement…or are just unemployed. In any case, you might say that if this trend continues, it would be a little bit like having a factory geared up to produce at certain rate, but week by week, fewer and fewer workers showed up to do their jobs…And sooner or later there would be serious consequences…
See for yourself…I welcome any theories as to why this is happening…
The truth is, I’ve got more I could throw out there but I think I’ve gone far enough with this for one newsletter. The bottom line, I guess, it just the chart below…and the reminder that whether any of these markets go up or down is more a matter of perceptions and mob psychology than anything else…and that the value of no stock is “real” or scientifically determined…And though I am not going to start a campaign to short the stock market (I have better trades elsewhere and I cannot mentally handle too many trades at once), I do think the odds now favor some fairly large percentage sell off…even as much as something in the 25-30% range…and can only hope it doesn’t become bigger than that.
Too gloomy? Crazy stuff? I hope I’m wrong. If you can see it differently, give me a call and tell me what you think. I honestly think the downside action so far has been minimal compared to what may be coming…and I would love to have someone convince me otherwise.
Again though, everything I have posted here is actually directed towards the continuing bullish set up for the Treasury Bond market…and my belief that WHATEVER the stock market does, I still think Bonds are going higher…As I’ve written for months now, I believe Long Term Interest Rates are going to stay “low” for years to come…And it IS possible that those continuing lower rates can keep the stock market on stronger legs…and keep it going…So I’ll just stick with the Bonds from a trading perspective.
Here’s the long term look in Treasury Bonds…I think, at a minimum, the current move will match the old highs…still about 9-10 points ($9-$10K per futures from here)…and the bigger picture, for some years to come, will be a trade more or less banded between 130 and 150. Again, Rates don’t HAVE to go back up.
The position I am taking…right here, tonight and tomorrow…
Again, I am almost certain ALL the wrong way Bond bears are looking at yesterday's spike and thinking, "That was the top!”, and they are all right back on trying to be short. AND ARE STILL WRONG…When we do finally reach the top tick, they will all be talking about “the flight to quality in Treasuries” or “yields staying low for a long time” or simply, “You gotta own the Bond market”. Right now though, I’m pretty sure they are still bearish.
I ABSOLUTELY REMAIN BULLISH THIS MARKET.
This is not a trade for everybody. Options have gotten more expensive but I think this market is a buy, right here at 143-143 1/2. I fully expect to see new highs in fairly quick fashion…and I didn't just post that option value up at 154 for nothing. I think the action of the past 2 days are indicative of the type of big move we are about to see on the upside.
Give me a call if you want to know more…
Long Treasury Bonds and Soybeans. Short Feeder Cattle and Cocoa (all included in last night’s letter)…Four great trades I think…Smart thing is to put on all four, with maybe $2500 in each market…AND FORGET YOU OWN THEM FOR 60-90 DAYS. REALLY.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Treasury Bonds, Soybeans, Feeder Cattle, Cocoa.