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Nov. 11, 2008
Who is short? Anybody, really?
I have been wrestling with trying to figure out how this once in
a lifetime economic disaster will play out...And the truth is, I
don't have any more of clue than you do as to where everything
is headed, nor, I might add, do any of the powers that be,
right up to the Secretary of the Treasury or the Chairman of the
Federal Reserve. Nevertheless, what follows are some
observations and my conclusions as to what I think will happen
and how to possibly profit from it.
Some notes I have made to myself during the past few weeks...
A year ago, NOBODY in the investment industry was telling you
get out of stocks.
Three months ago, NOBODY in the investment industry was
telling you Crude Oil was going to be cut in half.
Three months ago, NOBODY in the investment industry was
predicting an all out 20% rally in the US Dollar. Au
contraire, the Dollar was supposedly headed down forever.
A year ago, NOBODY in the investment industry was telling
you the almighty Chinese economy was about to see a 70%
crash in their stock market.
Two years ago, NOBODY in the investment industry was telling
you housing prices would be dropping by 20-30 %.
My point is, if you think there is ANYBODY out there who can
tell you how all this is going to turn out, you are
mistaken.
The world is more upside down than any of us
have ever seen it. All of this uncertainty probably
represents continued volatility (i.e., big price moves)
which can therefore lead to potentially large
profits...or losses...So, in this environment, all I am
trying to do is make the best half-assed educated
guesses I can, define my risk (primarily using the "2 &
1"), put my money on the table... and see what happens.
I recall an old Fed study of Leading Economic Indicators I
came across 25 years ago which concluded the single best
indicator of future economic activity was a rise or fall in
raw commodity prices...As in all economic studies, nothing
is absolute, but if there is any truth to that Fed study, a
quick glance at the monumental sell offs on commodity price
charts would suggest we are headed for a massive
economic contraction, potentially much larger than any
"recession" the typical analyst or economist might be using
as a model. I would suggest that all of the
commentary you hear as to what quarter this or that sector
of the economy, or the stock market, will finally bottom out
are no more than stabs in the dark, based on the fact that
virtually all of the recessions after the Depression "came
back" in some average number of months, and can therefore be
expected to do the same this time around...But I would offer
this time around is obviously something quite
different...much darker and much worse.
With the severe selloffs in many commodities
(charts follow), I had been leaning towards the idea of
finding markets to buy, but have finally come to the
conclusion this is not the time to be attempting to predict
when or at what price lows will be made. For now, I
believe you just stay on the short side, because, let's face
it, that is NOT where most people are...My
perception is, the typical mindset among traders, whatever
the market, is "where do I buy it?"...And how many, many,
many times have all of us just "known" this or that market
was so beat up it "just had to be a buy", or "probably
didn't have much more downside risk", only to find out there
was a ton of money still to be lost (or made) as that market
kept on heading south?
Yes, many commodities have fallen substantially
but I think it is important to note many of those markets
are still at prices that several years ago would have been
considered extremely high...And as we are most definitely
NOT still in the same hyper inflated bullish commodity
atmosphere of a year, or even six months, ago, but rather
in a severe negative growth environment, some of those
already fallen commodities are still at fairly ridiculous
levels. For example, even though Soybeans have
dropped from $16.00 down to $9.00, they are, by no stretch
of the imagination, "cheap", nor for that matter are 92 cent
Live Cattle, or $730 an ounce Gold...And I am therefore
looking for the right time, place and strategy to be short
all three of these markets, as well as several others...I
believe the fact that Beans are not yet $2.00 lower, or
Cattle 20 cents lower, is simply a function of time and
leftover bullish attitudes. In other words, Cattle cannot go
from $1.15 to $.75 a pound in a matter of days...It takes
time to make a move of that magnitude and there are probably
plenty of cattle people and speculators around who are still
hooked into last years bullish "story" and willing to buy
the market as it falls, thus preventing an overnight 30-40
cent price collapse.
In general, I will say I cannot imagine a near
term return to anything even remotely approaching the bull
market in equities we have seen since 1982. Compliments of
the 2000-2003 bear market in stocks, followed by the 40%
decline the investing public is now dealing with, I believe
a generation of investors are in the process of leaving a
marketplace to which they will never return...And
without the public earmarking "x" percent of their
retirement accounts for stocks, the fuel simply won't be
there to see another run like the one that has taken the
Dow from 770 in 1982 to 14,198 last year (1850% in 26
years!) Let's face it...the Stock Market is NOT a nice
place. It does NOT exist to make the average guy wealthy and
the idea that "it always goes up" is tremendously
misleading. To me, it's just a big casino, maybe more
diverse and slower moving than commodities (most of the
time), but it's still just a game where the public, at least
once a decade, gets clocked...from whence many people never
return...And this latest go round, which I
suspect is far from finished on the downside, is the one
that possibly either breaks everybody, or at a minimum,
chases them off forever...
Which leads me to the Treasury Bond market...With
the fact that the working public will still have to do
something with their retirement funds,
I firmly believe more and more and more and more of those
funds will be ending up in Bonds, and one result will be a
potentially monster bull market in what I consider to be the
safest, most desired piece of investment paper on the
planet, or, US Treasury Bonds...I believe we are in
something of a steep deflationary spiral, and with job
losses potentially now in an accelerating phase (meaning NO
wage inflation), we are in an environment that should be
extremely conducive to much lower long term interest rates,
and much, much higher bond prices. As some of
you may know, I could easily put you to sleep with
page after page as to what I see in the bond market, but
I've learned that nobody really wants to hear it...So, all I
will say is, the Baby Boom Generation has represented a
worldwide boom in gobbling consumption, which led to roaring
bull markets in stocks, and real estate, and
commodities...And now, those bulls are all "done"...and this
generation will primarily be concerned with holding on to
what they have (and haven't lost), and fixed income is where
the bulk of their investing will occur...And Bonds (formerly
an Old Fogey instrument) will end up being the object of
their desires.
Enough claptrap...Here are some charts and a few
recommendations....
Give me a call if any of this interests you...or if you have
any ideas of your own you'd like to explore,
Thanks,
Bill Rhyne
866-578-1001
770-425-7241
Buy Treasury
Bonds...Inflation is DEAD. Job growth is dead. The world
monetary authorities are throwing everything they have at
the economic crisis and you can bet that bringing long term
rates sharply lower (and therefore Bond prices higher),
somehow, is part of their plan...
Take a look at the velocity and
percentage size moves have been, virtually straight down, in
all of these major commodities and tell me you think there
is even the slightest possibility inflation is going to be a
problem...To the contrary, the problem is DEFLATION (when
everything is losing value), and it is a hell of a lot more
serious than inflation. In fact, it is specifically this,
deflation, that gave the Great Depression its
name...Are we headed for some 21st Century version of a
Depression?...I don't know but I do believe all these
following charts make a major case for owning the Bond
market.
We are shorting the
Soybean complex again...immediately.
Backing off of our
positions in Lumber and Cotton....
And we still see Cattle as a
MAJOR SALE and this is currently our largest position. It
doesn't mean I'm right, but if I could only make one trade,
this is absolutely the one it would be...If you want
something to get started with, I think this is it...
Gold must be a short....Think
about it. As you can see from all the previous charts, the
inflation boogeyman that Gold bugs are always touting is
TOTALLY behind us. The idea that the Dollar has lost its
status as the world's reserve currency and is a piece of
worthless paper is also a dead idea. And the WORLD is dead
in the middle of the worst economic crisis since whatever,
and Gold has been going down? And is just laying there? As
always, I may be dead wrong, but I think this market is
screaming, "Sell me!"...And I would add it needs to be done
before all of those zillions of sheep who piled into Gold up
there in the $900-$1000 range wake up and realize if none of
the above could rally Gold, what is?
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