August 13, 2008
A lot continues to happen all over the markets...
I can't help but note how the media is seemingly dead certain the 27% decline in Crude Oil almost "guarantees" the resumption of a bull market in stocks...My own feeling is stocks have done very little on the upside with the oil sell off, and seeing the Dow make new 2008 lows just doesn't look that difficult (see chart below) to me...And if the yearly low on July 15th low is taken out, it's sure going to look like the last month's action was nothing but a brief pause to sucker some money back into the market...and the move from there on down could get much nastier than the relatively slow grinding sell off we've seen since last October...I still think the Dow is headed, at least, to the mid 9000's or so...
Whether or not it actually has anything to do with what moves the markets, I can't imagine the housing thing is about to suddenly improve (especially as we now head towards fall and winter) and the upcoming election must have many business plans on hold...And the consumer? Even though gas prices have come off, I think the average middle class American family is still gasping for air and consequently the economy is no where close to turning upward.
Still Buying Treasury Bonds
I continue to expect a MAJOR bull move in Treasury Bonds between now and year end as long term interest rates fall dramatically. With commodity futures prices having basically begun new BEAR markets (in my opinion) and the economy currently going the "wrong" way, the last thing I would expect from the Fed is higher interest rates...I look for inflation to totally disappear as a threat (which didn't seem to dent Bond prices anyway) and jump starting the economy to become more and more and more of a Fed concern...If this is the case, lower interest rates, meaning higher bond prices, is the first and most obvious place to start.
I would also point out that in 9 of the last 10 years, the December Bond contract (shown below) has had at least a 10 point rally at some point during the calendar year. In fact, those rallies have ranged between 10 and 19 points with the average having been 13.88 points ($13,880 per futures contract). Maybe these are irrelevant statistics, but the fact is, so far this year, the biggest rally to date in the December 2008 contract is 5 3/4 points...
Still Short Soybean Oil
As mentioned in my August 7th newsletter, we took fairly big profits last week but maintained our short position in Soybean Oil by "rolling down" from the 60 & 61 puts to the 50 & 51's, now using the 52 calls as our defense (2 puts to every call). Even though I look for this market to reach the low 40's, with the size of the recent sell offs in Corn and the Soybean complex, there is obviously the potential, at any time, for sharp rallies, as evidenced by today's limit up moves in Corn (+30), Wheat (+60) Soybeans (+70) and Soybean Oil (+2.50). In general, if this rally carries roughly another 3 cents higher in Soybean Oil, I estimate we will be able to recover 100% of our current investment by selling the then profitable calls plus whatever the puts are worth...and will then most likely reposition the whole thing short again using higher strike prices...Otherwise, it wouldn't surprise me at all to see these rallies fail fairly immediately in which case we will just sit on our existing short positions. For a "guide" as to how bear markets DO produce rallies that look like upside reversals, using Wheat as an example, see my July 17th newsletter.
Maybe I'm dead wrong here but I'm fairly sure the vast majority of traders will see today's across the board limit up markets as a "confirmation" we've finally seen the lows they've all been predicting for many weeks and many thousands of dollars per contract now...Maybe this "bottom" will only last a day or two, or maybe even weeks, but as we carry on towards a plentiful soybean harvest, I still see agricultural weakness coming, specifically in the soybean complex and plan on maintaining short positions there.
Still Selling Cattle Complex
I still think the Cattle market is somewhat in "LaLa" land and will soon go the way of all the other commodity price failures we've seen lately. I continue to remain short both the Feeder Cattle (cattle bought to place in a feedlot to be fattened up for slaughter) and the Live Cattle (cattle ready for slaughter). According to the futures markets, the price you pay for beef will be rising sharply over the next 3 to 6 months. In this economy I just don't see it...And I also know that the cattle raising crowd has been all "bulled up" for the entirety of this year, expecting stronger and stronger cattle prices, which raises the possibility (and not for the first time) there are a LOT more steers in the pipeline than anybody is prepared for, and overwhelming supply might just be now meeting weak demand...and prices will be heading down, not up, and maybe in a very big way...As I often point out, the meat markets more frequently become stupidly one directional than any markets there are.
As regards energy, I think the most logical thing is to suppose Crude Oil probably has begun the formation of a long term top that will be characterized by a 5-6 months of violent up and down swings before heading south for the winter. On the other hand, this WAS the biggest, baddest, loudest and supposedly never ending bull market out there, and its reversal, so far, has only been for 27%. When you consider the almost routine 35-45% futures markets retracements of the past 2-3 years, this could easily leave the door open for a hell of a lot more downside before oil stabilizes. The important thing, I believe, is Oil died because it was crushing the USA and world economies...and still probably is even at $115...and $150 Crude Oil (and everything energy related) will end up being like the Dotcoms of 2000...In other words, don't expect to see $150 Crude again, if ever, for a long, long time.
That's enough of my claptrap for now...Except to just say, the winds have been a little lucky for us lately, but believe me, I have no illusions it has anything to do with intelligence...
Call me if anything here interests you, or if you have your own ideas you'd like to kick around.