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November 14, 2009
This is probably the dumbest newsletter I have ever written, not so much for the content, but for the absurdity of its length. I really started with the idea of presenting a brief semi-cumulative overview of the markets before getting into some specific trade ideas, but before I knew it, this piece had evolved into something massively, ridiculously longer...Bill Rhyne taking himself too seriously...and the result is a product I suspect very view of you will even try to read...Skim it maybe...but actually read it? No way...I, myself, HATE long newsletters and really do try to keep this one fairly straight to the point, but by the time I realized what was happening here, I was in too deep to turn back (dump it all in other words), so ahead I went...I suppose the reason behind this "epic" is I DO believe we have reached major turning points in a number of markets...Undoubtedly, some of what I've written here is right, and some of it is dead, dead wrong, but hopefully there are some ideas here that help you make a little money in the markets...
Give me a call if you do want to look at any of these ideas...or talk about any of your own,
Bill Rhyne
November 14, 2009
Since returning to the USA in late June I've actually written four newsletters dealing with something other than the soybean complex but all of them only reached the 80% finished stage and never went out...After giving my 10th grade son a speech last night about "there are times in life when you just get the job done, no matter what it takes", I have decided to take my own advice and write this damn thing, to its conclusion, and send it out today, no matter what it here goes.
What the "experts" think...
Let's start with a few opinions that I perceive to be fairly unanimous (and I believe wrong) among the analytical/economists/media community...While there are certainly times it pays to go with the prevailing media winds, in general, all markets do reach a point when seemingly 100% of the "logic" as expressed by the supposed experts points exclusively in one direction, in which case just about everybody who could possibly want to jump on an idea is therefore already on we have all seen time and time and time again, it is therefore then best to get yourself on the other side of the fence...Just as 99.5% of the world's talking heads and Wall Street analysts did NOT predict the Dow crash, or the housing & mortgage debacle, or the $110 bear market in Crude Oil...OR the ensuing 3700 point, last six month's rally in the Dow, or the 150% $50 re-rally in Crude, I can promise you it has always been that way and always will be...There are a million guys in suits out there who make their living by spouting opinions (myself included), and I can assure you, only about 1/2% of them know anything more about where the markets are headed than you do...And when those occasions occur in which you hear, ad nauseum, totally one sided "logic" being expressed by those well dressed talking sheep masses, more often than not, it IS time to go the other way.
So, what do the "experts" think...? And just to be clear, I absolutely disagree with all four of these opinions, and am, in fact now taking positions directly opposite them...
1. The number one universally held opinion out there is: "The Dollar is going down!"...Unless you've just returned from Mars, you have certainly seen and heard this everywhere with all sorts of "logical" analysis as to why the dollar can ONLY be headed south...
2. Due to the "falling Dollar", together with all the money the government is pumping into the system, as well as the never-ending Chinese and Indian appetites, commodity prices can ONLY be headed higher...and inflation, or even hyperinflation, is therefore is just around the corner.
3. Gold, the "inflation hedge" which has quadrupled in the last seven years, is still a buy and can still double or triple from here...and EVERYBODY should own some gold to protect against inflation as well as the highly laughable opinion (to me) that the world financial and currency system could disintegrate.
4. Due to the coming inflation, and all the debt being issued/incurred by the United States' deficit spending, as well as the supposition that the falling dollar could also mean foreigners will no longer want our Bonds, interest rates can then ONLY be preparing to "SPIKE" higher... and Bond prices can ONLY be headed lower.
To be sure, there are some other quite clear, also almost universally held opinions out there, but from what I've seen, none of the four I've listed here is at all in dispute, and interestingly, they are all linked together by the "certainty" of a decline in the dollar.
And as I said above, and not simply because I am some ever-opposite-the-crowd contrarian, I AM taking positions against all of those opinions...Hopefully without getting too longwinded, I'll try to explain why...
Buy the U.S. Dollar Index
I think this seemingly unanimous rhetoric about the US Dollar having entered some bottomless decline relative to the rest of the world's major currencies is hogwash...All you have to do is look at how the United States Dollar and US Treasury Bonds went virtually straight up last year when everybody thought the international financial system was about to collapse...
In other words, when the chips were down, if you were looking for monetary safety, the United States and US Treasury instruments were what everybody wanted...They weren't jumping all over Euro's or Pounds or the Chinese Renminbi, or looking for Brazilian Bonds...They wanted US Dollars and Dollar denominated fixed income instruments...And I don't think it is even remotely possible that same DECADES-in-the-making mentality has simply disappeared in the last six months...The USA is STILL the safest, number one, and most highly desired business location on the planet, the United States is STILL the locomotive for the world's economies and the US Dollar is NOT about to be displaced as the world's #1 reserve currency. The Dollar is just like every other market we trade...Sometimes it's going down...And sometimes it's going up...And come on, how many times do have do see ALL those jerk-offs (sorry) on TV, ALL regurgitating virtually identical "our research indicates" foregone conclusions that such and such a market is going to do so and so, to KNOW you should be looking at the other side of whatever idea they are ALL espousing? 
The truth is, however, just about any economically fundamental reasons anyone might have for buying or selling the dollar are probably irrelevant...Why?...Check out the following quotes from Alan Greenspan, the guy who for almost two decades, as Chairman of the Fed, was at the top of the economic information chain. In other words, he had more advisors, more computers, more data...more everything...than anyone could ever wish for when it came to predicting the economic future of the planet...Even so, this is what he had to say on two different occasions when answering questions as to the direction of the US Dollar:
"There may be more forecasting of exchange rates (currencies), with less success, than almost any other economic variable"...Alan Greenspan, July 16, 2002.
"Statistics have shown that forecasting exchange rates (currencies) has a success rate no better than forecasting the outcome of a coin toss"...Alan Greenspan, Nov. 19, 2004.
I have presented both of those quotes in earlier newsletters but I keep them in my files to remind me NOBODY knows where the currencies are headed...And more importantly, as we have now reached one of those points in time when EVERYBODY is running around mouthing the same so perfect and supposedly so independent bearish US Dollar analysis, it IS time to be looking for the opposite...Not only based on what Mr. Greenspan had to say, but also from my 11 years at Merrill Lynch where our Atlanta office would occasionally be blessed with visits by teams of international currency bluebloods, all of whom were presented as "knowing" what the Dollar was going to do, and NEVER ever were anything but dead wrong, my very firm opinion is right now the last thing you want to be betting on is this so popular idea that the US Dollar is a market to be short.
I expect to see the US Dollar Index appreciate something like 30-40% in value during the next 6-9 months. I am therefore immediately recommending long positions in the March or June 2010 contracts, with a minimal objective of 15-20 points ($15,000-$20,000) per contract.
As always, there are any number of approaches you can use to establish a position, including our usual recommendation of "units" composed of two calls to every put (or vice versa in bearish trades), but for simplicity's sake in this monster newsletter, I have only listed the price of options in the direction I think a market will be moving....
If you think Buying the Dollar does make sense, here are a few ways you might go about doing it...
Short the Eurocurrency
This is essentially the same thing as buying the US Dollar Index, which is actually a "basket" of six currencies (British Pound, Canadian Dollar, Euro, Japanese Yen, Swedish Kroner, Swiss Franc) but in this case you are taking a position that only involves the direct relationship between the the US Dollar (not the index) and the European Eurocurrency.
This is easily a useless point to make, but while in Europe earlier this year, with the Eurocurrency actually 15% lower than it is now, my feeling was, for anyone, from anywhere, holding U.S. Dollars (not just American tourists like myself), prices in the Eurocurrency had simply reached the "stupid" stage. Travel has always been one of my great passions, which has resulted in my having spent approximately six years abroad in approximately 50 countries during my 60 year lifetime, so I'd offer that I'm not some whiny, first-time-abroad American complaining that "everything is too expensive!". I mean, day after day, when I found myself faced with situations like paying the equivalent of $50 for four breakfast rolls and four beverages in a little coffee shop (we didn't, we made our own in the RV), all I could think was, as I said, "stupid" or "monstrously overvalued!". Yes, this is a totally unscientific observation, but in the end, values are really a function of perception, and my own perception is there is NO way the Euro can stay at its current levels. It IS absurdly overvalued and out of whack with international reality...Admittedly, taking the cost of a breakfast and including it in an economic analysis of currency values is itself quite absurd, but I do know the cost of that breakfast can be directly correlated to the cost of anything European, whether it involves tourism, exports, basic standards of living across the continent, or whatever...and in my simple mind, the Euro has no place to go from here but down.
I am recommending short positions in the Eurocurrency using the March and June 2010 contracts, with a minimal expectation the Euro will drop 25-30 points ($31,250-$37,500---this is a big contract) per contract from current levels.
Here are the March and June contracts I would recommend using to position on the short side...Again, I may be dead wrong but I am looking for at least a 25 to 30 point move on the downside...
Short the Gold Market
Whether in the form of pundits with their unanimously bullish "long term" price predictions, or in those endless, sleazy radio and TV ads (on the network evening news at that) hawking gold to the masses as "an inflation hedge", or as protection against a collapse in the US dollar, or for that matter the failure of the international fiat currency system itself, thus resulting in gold becoming the "new money", or in the latest news that, "Oh my God, India just bought 200 tons!", THE BULL MARKET IN GOLD IS ALL OVER THE the extent that I would then state: If this does not resemble a BUBBLE, I don't know what does.
After the fact, Stocks were a bubble, Real Estate was a bubble, Oil was a bubble...but none of them were considered as such when they were banging new highs. They were only identified as bubbles after we had witnessed their massive collapses...which is, I believe, exactly what we are now facing in Gold...Sure there are people who think it could "pull back", or "correct", but the overwhelming majority of opinion is, as you must be aware, "no where to go but up!" (just like there is no where for the dollar to go but down).
My own two cent opinion is this IS the latest bubble and I would not be the least bit surprised to see Gold trading at half its current value within the next year...or even by late spring or early summer. I think the current "story" in Gold is just another ROUTINE example of how all of the financial markets are really nothing more than a big mob psychology game in which the masses are periodically separated from their money...Believe me, rising prices in gold have nothing to do with the classic supply-demand equation in which production is being overwhelmed by ongoing industrially related demand...Gold goes up primarily due to more and more (and MORE) investors buying into the idea that they "need" to have some money in this "asset class" to protect against....etc., etc., etc...Gold, then, has been rising on "investment" demand, with that word "investment" being the key here...Sure, there are people actually buying the real metal, but when you consider the majority of investors, through gold stocks, or more likely, Gold ETF's, are really just investing in an idea, NOT the real thing, it should drive home the fact that this "investment" is nothing but one more piece of paper, with a big story to support it, and therefore is inherently subject to the investing world's laws of gravity; And however convincing the logic may be today, the perceived value of Gold, or any market, can fall (more precisely, evaporate) much, much faster than the public wide realization that they have all bought into another oh-so-sensible idea, and have, one more time, lost their shirts...Maybe I'm just a jaded, old school commodity broker, but during my 29 years of living with the insanity of the futures markets, I have seen this happen TOO MANY times in TOO MANY markets to not understand it will happen again and again and again...Something is "worth" 10 today, but then 5 tomorrow, or even 3...and THEN everybody wakes up to fact there WAS another side to the "story".
For gold to keep climbing, I think you have to assume that inflation is soon to come roaring back...And I do not. For one, to have systemic inflation (which is quite different from the fact that most consumer prices normally do tend to creep higher over long periods of time) you have got to have wage inflation...that is, you have to have a situation where employees everywhere are demanding more pay as they are unable to keep up with a rising cost of living; And in today's environment, we all know the last thing anybody in the work force is demanding is more money. Right now, people are just trying to hold on to their jobs. Right now, a lot of people are even taking new jobs at lower wages, meaning consumers have less and less money to spend. Hence, even at the most basic consumer levels, fast food for example, prices are actually falling...This is NOT going to abruptly change overnight. This is not the recipe for systemic inflation...and in reality, the Feds are rightfully much more concerned about deflation than inflation.
As for true commodity price inflation, besides my argument the whole dollar falling-bullish commodity scenario is about to be disintegrated by a dollar rally, I would also point out that the tremendously overworked "China and India are buying everything!" commodity story has its holes as well...Without great detail, I'll just say that one of the "almost universally held opinions" I mentioned earlier would include the current popularity of investing in "emerging markets" (also tied directly to the "falling dollar" story) which do not take into account that anytime you invest in an equity (i.e. pieces of paper) market that has just doubled in the last 9-12 months (Shanghai +97%, Bombay +108%, Brazil +112%, just to name the big three in this category), you are kind of asking for it. Sure they may keep going, but if you do even begin to make this sort of investing a habit, I'd offer you are bound to fail...But the real point here is, those markets can take a big hit, and so can their economies. I don't mean these countries are about to crumble and burn, but I would suppose they are just as susceptible to market sell offs AND economic contractions as every other country in the world today, or for that matter, in all of history...My sense is, because China is so big, there is almost a perception among analysts that they can ONLY keep growing, just because they want to, and therefore, there is then the blind assumption their appetite for commodities will continue to do the same...which, again, I think easily may be in error...Do I know this is going to happen? Hell, no, but I do know they are just as subject to the realities of economics as everybody else, and expansion and contraction, whatever a government desires, are distinct aspects of that reality...And, hey, let's not forget that these massive populations do not come without their disadvantages...China and India are not economic utopias...Yes, they may have millions of new consumers rising up, but they also have hundreds of millions who do not have the extra bucks to buy their first cell phone...They are just trying to scratch up their next meal.
For gold to keep climbing, I think you also have to assume the system is going to fall apart...And I do not. Aside from my belief the system falling apart would mean EVERYTHING, gold included, would crash in value, I really don't think the world's diplomatic, economic and financial systems have reached "the end of time" nor anything approaching it...I don't mean everything is peachy on the planet but I do think we have returned to a state of affairs in which we are no longer dealing with the massive financial surprises that crippled the system during the last year or so. Yes, there are worries to be dealt with, but when has this not been true? Whether it's the deficit, or social security going bankrupt, or terrorism, or wars, or oil prices, or the Middle East, or inflation, or deflation, or rising rates, or stock market bubbles & crashes, or the Savings and Loan buyouts, or Enron, or Long Term Capital Management, or the Southeast Asia Crisis, or immigration, or bitter elections, or 9/11, or a North Korean maniac, Katrina or WHATEVER---In a normal economic world, there are ALWAYS critical events and situations which need addressing by the powers that be, and all of these crises are replete with multitudes of talking heads wringing their hands in despair while complaining that "what the government is doing just isn't working!", but somehow, the abyss has always been averted and we have all gone on happily with our lives, careers and retirements...Yes, the last few years have been devastating and the damage done has been on a scale unseen in decades, but aside from the fact that virtually every government in the developed world is doing everything it can to reboot the system (which WILL result in a positive, forward moving outcome), I also firmly believe there is a global economic inertia in force which was spawned by the confluence of the Information Age (basically computers), Globalization, and the 1989, century-in-the-making, victory of Capitalism over Communism...Today, the world is all about business and economic development, not political ideologies, and although we have recently been through a major bump in the road, what we've really done is wrench out a number of excesses, and from somewhere soon, my guess is we'll be screeching back towards relatively full throttle...Though spending habits may have changed some, the consumer oriented personality/nature of the developed world's population will still be what it was two years ago...and I suspect we will quickly be back on the same tracks we were on before. Maybe there will be some degree of subdued financial behavior for a while, but I'd suppose it will not be long before those masses will be back to buying consumer goods and services very much like they used to...which is what keeps everything going...and several years from now, just like the recessions of 1973-74, 1980-81, 1990-91 and 2001-02, all the sad stories will just be memories...of very real and very difficult times, for sure, but NOT a collapse of the system as we know it.
The bottom line is, while there is still bad news galore, I absolutely believe we have turned the psychological economic corner (quite important), and while I don't expect world or US GDP to suddenly be zooming along at 5% annual growth, I do think the global capitalistic system is still very much intact, inflation is NOT a problem, and the world is, as I said before, very much back to normal...And in this environment, I do not think Gold is therefore worth $1100 an ounce, or anything approaching it, and I firmly believe the next big move in Gold in going to be down. None of us are going to be hauling around gold bars to pay for groceries and nobody is going to be getting rich just by listening to some huckster on TV telling you how you can "triple your money!"...And believe me, just because a few guys at the Reserve Bank of India decided that now (?) was a good time to buy 200 tons of gold does NOT mean it is going up. Just as Ben Bernanke will tell you the Fed can only make guesses as to the future, so is it also with the Reserve Bank of India...I can assure you, and history has shown it, Governments and Central Banks, can buy the top of any market just as badly as might any individual in the world...And after all, whoever made this decision in India HAS done their buying NOW...and NOT three years or $500 ago. 
I am taking short positions in the April and June 2010 Gold contracts and would not be at all surprised to see at least a $300-$400 drop ($30,000 to $40,000 a contract) in price before June goes off the board...  Think about it...If just 6 or 7 years ago Gold was "valued" at $300 an ounce, and if international economic confidence and stability are now inching back on track, would it really be that big a surprise to see gold "revalued" back to $600-$700 an ounce...or lower?

Long Term Interest Rates are Heading Lower,
Buy U.S. Treasury Bonds
Those of you who have read my claptrap for any length of time will know I could probably write 40 pages as to what I see in the Bond market...This is where I have easily had my greatest trading successes (and some major disasters) throughout my dastardly career, and also where years ago I came to the conclusion that Treasury Bond Futures should be classified as THE CONTRARY OPINION MARKET; that is, as the single area of the markets where the trading masses, and specifically those "experts" I so frequently deride, are generally forever backwards in their opinions as to what is going to happen...Furthermore, I believe the rate markets are generally dominated by individuals who have, let's say, just for the general sake of this argument, the habits, mentalities and personalities of (with all due respect) just about any banker you know. In other words, the majority of the people trading and opining on interest rates have spent their careers coming up through VERY conservative ranks, and have very definitely not risen through those ranks by being risk takers...or boat shakers...And my more specific impression, easily in error, is that the biggest "opinion sheep" in all the markets are therefore to be found in the interest rate sector...Putting it in other terms, the majority of these extremely conservative, risk averse (career and marketwise) participants in this area of the markets don't think anything, really, unless they can hear the same thing from ten, or fifty, or a hundred other likeminded people in their industry...They only buy or sell when they know everyone else is doing the same...which often results in globs of them all piling in together, the wrong way, at major bond market tops or bottoms...and thus truly become, over and over, like "sheep sent to slaughter"...This is obviously a tremendous oversimplification and generalization of what is a colossally sized market, but I firmly believe this to be an important aspect of the interest rate markets...And right now, if you follow interest rate commentary at all, you are certainly aware that virtually no one amongst the sheep is calling for Bonds to go up...Quite the contrary, seemingly 99% of the analysis I see is of the opinion that a "spike up" in interest rates is dead ahead, and Treasury Bonds, therefore, are only to be shorted...I ABSOLUTELY disagree and I am a buyer in the March and June 2010 Treasury Bond contracts, expecting to see at least a 1% to 1 1/2% decline in 30 Year Treasury yields (currently about 4.4%) within the next 6-9 months and at least a commiserate 15 to 20 point rally ($15,000-$20,000 per contract) in the Treasury Bond futures market.
Here are a few of the "reasons" you'll probably have seen as to why rates are going higher (and again, I think they are in error):
1. The government is issuing too much supply to finance deficit spending, selling billions of dollars in US debt instruments, which can only drive bond prices lower (to attract  buyers) and interest rates higher.
2. With the dollar falling, there is the risk that foreign buyers, like the Chinese for example, will not want to buy our bonds, and may even start selling what they already own, also dropping the price of bonds and forcing interest rates higher.
3. All the money the government is dumping into the system for all the bailout programs will eventually result in massive inflation as there will just be too much money chasing too few goods.
4. Everybody "knows" that when the economy picks up, interest rates have to go up.
There are other reasons being presented out there, but these are the big ones...and to be clear, I totally disagree with all of these assumptions...
The first thing I'd say is THERE ARE NO REAL SELLERS IN TREASURY BONDS. Yes, governments issue (sell) bonds but in the investing world, nobody is really a seller. Analysts can talk all they want about shorting bonds, but the truth is, anybody seeking security who already owns US Treasuries, the safest piece of paper on the planet, is holding on to it. If you own, for example, a 30 Year Treasury that you purchased 10 years ago, that is yielding 6.0 %, guaranteed by the US government, and this bond will be paying you that 6.0% for another 20 years, are you going to sell it? And do what with it? Put it in a money market paying nothing? Or risk it in stocks?...I doubt it...
Conversely, I think the worldwide demographics of the aging baby boomers have become more and more of a factor on the DEMAND side of the bond market...During the 1980's and 1990's, baby boomer consumption was a major driving force in the economy, and beyond that, with the advent of the world's first government "mandated" retirement accounts in 1980, and the fact those same consumers were also very much encouraged by the government to stick part of their every paycheck in some piece of paper (again, the first time in history), these two decades saw a massive influx of money into equities, and the parallel result was the biggest non-stop bull move in stocks the world has ever seen...But, with two blood on the tracks "crashes" since 2000, I think it is safe to assume these now-beginning-to-retire boomers are thinking more about the old one liner concerning their return "of" investment, as opposed to their return "on" investment...Sure, the Gen X'ers and others will probably continue to plug long term money into stocks, but my guess is the vast majority of the "old guys", who now have most of the money, will be much more inclined to want the safety of fixed income as opposed to the risks they know are present in will, I'd say, maybe even a lot of not so old Americans who just don't trust the stock market anymore...No, I don't think the world is abandoning equities, but I do think the odds favor a robust, international, and fairly unceasing, demand for high quality fixed income for some years to come, which will soak up HOWEVER many billions of dollars of debt the United States wants to issue...And just as the stock market kept defying the pros by travelling higher and higher, during the 1990's in particular, we'll see something of the same in the bond market...And bond prices will keep going higher, and long term yields lower, for some years to come.
Concerning a loss of demand for our Treasuries outside the United States, it is also quite important to understand that globally, every day, there are literally billions of dollars that HAVE to be invested in some form of fixed income (bonds and other debt instruments that pay interest to the buyer) somewhere on the planet. This buying comes from all sorts of institutions, including governments, insurance companies, banks, brokerage houses, pension funds, etc., and their buying is not a function of deciding, "Let's buy some fixed income today", but rather, due to government regulations or their own charters, this is what they are required to do. The investing arm, for example, of an insurance company cannot decide, "Oh, we are required to invest these funds in long term debt today, but we don't like bonds at this level, so let's go buy some Microsoft instead." To be sure, they have guidelines that allow for some range of debt instrument choices, but the bottom line is, again, EVERY DAY THERE ARE, INTERNATIONALLY, BILLIONS OF DOLLARS THAT HAVE TO BUY SOME FORM OF FIXED INCOME...somewhere, in some country...And every country's debt is of a different quality (safety), and carries a different rate (the interest it earns) and is paid for in a different currency, which, when I put all this together, leads me to the conclusion that U.S. Treasury Bonds are currently the best fixed income investment on the planet, and however much gibberish you read about this or that country deciding they might now want to own any more US paper, this sort of talk is nothing more than political posturing.
Consider the following if you, today, were one of those institutions that does have funds that immediately have to be spent on fixed income investments...
Here are some rates on various countries' longer term debt instruments at the moment:  Brazilian notes at 13%, Australian at 5.7%, French at 4.28%, British at 4.35%, Swiss at 2.57%, Japanese at 2.27%, and the USA at 4.41%...From this list, you'll note that Brazil has the highest yield at 13%, but is also probably the riskiest place (on this list) to invest your money, which is precisely why Brazil has to pay a higher rate to attract money...Australia is attractive at 5.7%, but here you would be buying in a currency, the Australian Dollar, that is actually at its all time highs against the US dollar (up 100% in the the last 7 years), which is fine if you think this will be true for another 20 years. Otherwise, just a 10% downturn in the Australian currency would mean a potential 10% reduction in your total invested capital as compared to the US Dollar, meaning that 5.7% might not be so attractive after all...France and Britain are close to yields in the USA, but here again, you'd be buying in a currency that is at historical highs and therefore subject to the same currency risk as in the Australian Dollar...Japan and Switzerland in the 2%+ range? Not very interesting...Then you have US Treasuries...To start with, there ARE some smart people out there who don't use the latest newspaper headlines to do their investing. There ARE some longer range thinkers who don't buy the idea that the Dollar is headed south forever, who look at ANYTHING that is denominated in U.S. Dollars and think, "What a deal! Everything at a discount!", and there ARE hoards of conservative institutional investors who do look at last year's rally in the Dollar AND in US Treasuries, when international fear was rampant, as irrefutable evidence that US Debt IS the safest and highest quality paper on the planet...No, I'm not saying that all of these institutions are going to invest all of their funds in US paper, but I am saying that "Buy USA" IS going to be high up on anybody's list of "best" choices, and just as there has been enormous international demand for our debt, there will CONTINUE to be enormous demand...and the idea that "foreign buyers are going to disappear"  or "sell what they already own", is, to me, absolutely ludicrous.
The Fed stated at their Nov. 4th FOMC meeting that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period"...With Fed Funds (the rate at which Banks can borrow day to day from the Fed) basically at 0%, and the fact that "extended period" could mean years, I strongly believe the yield on the 30 Year Treasury, currently at 4.4%, has no place to go but down, and by next summer (or earlier) that yield could easily be down to 3%...If you think this sounds impossible, aside from the fact the 30 Year already did get down to 2.5% last year, look at Japan, for example, where their central bank also adopted a "zero bound" interest rate policy earlier this decade, and their 30 year bond got down as low as 1%, and even today stands at 2.25%...Additionally I would note that during all of the 1940's and most of the 1950's, at a time when the United States was averaging something like a quite boomish 6.5% ANNUAL GROWTH IN GDP, even then, Long Term US Treasuries were yielding between 2 and 3%...Don't think that just because this happened over 50 years ago makes it impertinent to today's world. Economics is still economics, in whatever century you want to reference, and just the fact 2.5% long term rates are already the case in Japan and Switzerland very much substantiates the possibility the same thing could happen here in the United States. 
And I would make, FINALLY, just a few more observations as to the rate markets:
One, the bail outs will not go on forever, and the current pace of US borrowing (issuing of debt) WILL diminish, meaning less supply coming to market.
Two, even with the massive borrowing the US has already done to help turn the economic tide here in the USA, long term rates have barely moved up at all...And, EVERY US Treasury Auction during the last year, HOWEVER big the amount of debt being offered, whatever the yield, has been basically "gobbled up" by the fixed income buyers of the world...which, to me, can only be taken as indicative of the inherent, underlying strength of US Treasuries in general.
Three, I believe wages and world commodity prices, on balance, are NOT moving higher...And inflation will NOT be a concern for years to come...which the Bond market will definitely "appreciate", and Bonds, therefore, will move higher in price.
Four, the USA is in a recovery, which will eventually mean expanding tax receipts, and less government borrowing (similar to what was experienced by the tail end of the Clinton administration), and with all of this taking place in an environment of less excess by all, and I would add, together with the fact we will no longer have to finance the war in Iraq (BIG MONEY,and possibly Afghanistan (we will get out at some point), several years from now the fiscal situation of the United States will be dramatically improved and the concept that "nobody wants our bonds" will have proven to be nothing but absurd.
So I'll repeat: I am a buyer in the March and June 2010 Treasury Bond Futures contracts, expecting to see at least a 1% to 1 1/2% decline in 30 Year Treasury yields within the next 6-9 months...and, at least, a commiserate 15 to 20 point rally ($15,000-$20,000 per contract) in the Treasury Bond futures market.
What Stocks will do...
As I usually have little interest in trading the stock indices (they have always seemed impossible for me, even when I'm right), I really do try to stay away from predictions as to where the equity markets are headed...and right now, following the recent blistering rally, I am even less inclined to do so...especially when I've already got a zillion words wasted here on markets I do want to be trading...So my comments here will be VERY brief (thank you, Bill).
1. For many months now, as the market has been in this non stop rally, all of my stock broker buddies have had zero (and I mean ZERO) interest from their clients in anything to do with equities.
2. You have to assume those businesses who are still standing today are most likely leaner, while also competing against less competition, with slightly lower energy and overall raw material costs, cheaper labor (as I said before, there is no upward wage pressure today), lower interest rates, and finally, I'd suppose, a HELL of a lot of pent up consumer demand that has been laying low for several years now, in just about any purchasing area you want to name...And all of those factors probably add up to an excellent climate to now be doing business, which in theory, would mean look for a higher stock market...
3. As stocks are, to some extent, supposed to be a barometer of future economic activity, my guess is the 3700 point rally in the Dow is presaging some excitingly positive economic numbers in the fairly near future...And as the belief grows that the economy is OK, the public, which, again, has not actively participated as buyers in the last six month rally, will begin to buy again...Unfortunately, the may be doing so from even higher levels, or maybe lower, but the significant thing will be their decision to finally buy again will have come "after the fact" (when the news finally gets good) and my guess is, six months from now, whatever they have recently bought will generally then be losing them money.
In other words, I think the news is going to be getting better, but the market, from somewhere soon, will begin a long slow grind to the downside. I have no idea how far it will go (or let's face it, even if I am at all right about any of this), nor for how long the sell-off will in force...But I do think, for some of the reasons I expressed earlier, that the crisis has passed, the world is not coming to an end, and we are not headed endlessly back down in the stock market.
I want to be short a number of
traditional commodities...
As I mentioned before, one of the most popular opinions around is, "Commodities are going up!", and Wall Street is therefore doing their usual thing of seemingly creating a new hot product every day, in the form of commodity ETF's and Index Funds, to "capitalize" on the public's willingness to buy into this latest, greatest, New York inspired "story".
I have been working in the futures arena for half of my life now (Good God!) and one of the earliest lessons I learned in this insanity, the HARD way, is, "popular ideas tend to lose money". Yes, this is just another variation of "the crowd is almost always wrong", but this so perfectly logical case for commodities going higher, that I see expressed everywhere, is virtually identical to what I was hearing when I went to work for Merrill Lynch Commodities in 1980...Some of you will know that prior to being hired, I was not even aware of the existence of the futures markets, and so I came into the business with a totally blank mindset as to what this stuff was about...The first thing I noticed, and naively fell into agreement with, was EVERYBODY thought EVERYTHING was a buy, for a 1000 highly "sensible" reasons, and NOBODY ever, ever imagined that any of the traditional commodity markets were a short...which was basically what they all were for a good 4 or 5 years to come...And this is kind of where I think we are once again...
I don't think we'll necessarily see commodity prices experience a 4 or 5 year decline...but I do think the following market all have potentially MAJOR downside potential...
And I WILL be brief...I am as tired of writing this thing as you are of reading it...
Still short the Soybean Complex
I have been on this trade all year, primarily using the Soybean Oil contracts, and to be honest, the incredibly long sideways move has done nothing but lose us money. It has also done a pretty good job of wearing me out psychologically...BUT...I still look at this market and cannot think anything but a MAJOR decline in price is coming and I intend to stay on it. Record high prices do usually inspire record production and that is exactly the case today in Soybeans. World production for the 2009-2010 crop year is currently projected to be 18.7 % higher than last year. This is an ENORMOUS single year increase, and I very firmly believe, at some point the market is going to reflect the fact that there IS no shortage of soybeans...and this now 13 month consolidation is going to "suddenly" become one those STRAIGHT DOWN bear markets I have seen "surprise" the masses hundreds of times...I'm beat up...But I still think this is one of the best "2 and 1's" I have ever seen and I am staying firmly, and aggressively, on the short side.
Sell Sugar
See the chart below. It's up. Yes, it went to 45 cents back in 1980 but that was a totally manipulated situation taking place on the back of the Hunt brother's attempt to corner the Silver market...It's grown in every tropical country you can imagine on the planet. It's up this time, more than anything, in conjunction with Brazil's use of sugar to produce ethanol. A 10 cent ($11,200 per futures contract) sell off between now and next spring would not surprise me in the least...This can be a nasty market, and once it does start down, I would look for the move to be unrelenting and brutal.
Sell Cattle
I was on this last year when it broke down from record highs and then again earlier this year while it went sideways...Even though I think the economy is definitively turning back up, by no means does it mean the beef market has to go up with it...After all, cattle are still coming off record all time high prices, and when cattle producers expand (encouraged by those record prices) they end up with a lot of animals that have to go through the whole year long fattening process...And as pretty much all I have seen from cattle people during the entirety of this year's sideways move is talk of "historically tight supplies" and that a "bottom was being made", my guess is there are a LOT more cattle out there than anybody is expecting...Put that together with the general chart look below, as well as the fact that EVEN A 3700 POINT RALLY IN THE DOW DID NOTHING FOR THIS MARKET, and I think you come up with extremely bearish possibilities...
I have often pointed out that some of the most dynamic, non-stop, one directional market moves that you ever see take place in the meat markets...And I think that is about to be the case here...A 30-45 day 10-15 cent ($4000 to $6000 per futures contract) collapse would not surprise me at all from here...
Sell Crude Oil
It's not worth $75-$80 a barrel. We're NOT, as trumpeted last year, running out of it. For sure, some day we will, but I maintain that even $50 oil has the refiners going all out to produce everything they can, whether it be in exploration, new methods of extraction, recovery or whatever...and while also remembering that just 5 years ago, $40 was a sky high price for crude, I'd then say that a $25-$30 fall in Crude Oil would really be no big deal at all...What I specifically recommend would probably be to short the Heating Oil market as we move into the heart of the winter season...One of the perversities of the futures market has always been that many markets "surprisingly" go down precisely when you would expect for seasonal demand to be pushing them up...And I will probably be looking to get short the "Heat" when the first BIG blizzard blows into New York City.
I'll put something out on the Heating Oil if I think the trade does have a good short "set up" further along towards Winter....
If you read this whole thing, I thank you. I am an idiot.
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