Sept 17, 2008
I don't have to tell you this is as wild as I've ever seen it, and I thank my lucky stars (recently anyway) that we are almost religious about using the 2 and 1 options ratio for virtually all of our positions...In markets like these, especially today, I can sit here calmly, not having the slightest clue about how all this is going to play out, and watch everything unfold, secure in the idea that all I really want is to see is this stuff flying hard in one direction or the other. Obviously, I want to see it go my way, but if it doesn't, I know our defensive options (those calls or puts we own that are the opposite of our opinion) can often make us enough to recoup 100% of what we have on the table. Obviously, it doesn't always work out perfectly...the strategy can definitely lose you money...but the point is, I am not worried sick and freaking out when these markets are seemingly making 2 or 3 monster U turns on a daily basis...The "Both Sides Strategy" really does make it easier to make rational decisions when you are in the midst of markets that are the epitome of schizophrenia and irrationality...I mean really, who in the hell can honestly say they fully understand everything that is going on now?
Again, I don't know what is going to happen but I do believe there is no way the Fed can escape, sooner rather than later, having to lower rates. The world IS a mess and no single action, whether it's a Fannie Mae or an AIG or a Bear-Stearns bailout...or another round of stimulus checks...or whatever measures the powers that be can come up with is going to immediately turn everything around. I DON'T think, by any means, the financial world is coming to an end as I firmly believe in the ability of governments and international banking officials to ultimately cooperate and apply the "juice" whenever and wherever necessary to keep the economic world on its feet. No matter what the political system, whether it be capitalistic, socialistic, communistic, an emirate or even a dictatorship, NONE of the leaders at the top want to see anything approaching a worldwide economic collapse, and I am sure they cumulatively have the means, and the mutual desire, to keep everything functioning. This is not to say there won't be rocky, maybe really rocky, periods, but in the end, I think the economic world keeps spinning and the financial system will be continuing to function...Yes I still can see the stock market falling a long way from here (and I certainly don't know if it will), and times may get much tougher than they are now, but I don't see us all not having bank accounts or doing trade in gold coins or other hard assets (which today's $90 rally in gold seems to indicate plenty of people see as a possibility).
Enough philosophical BS...Again, I absolutely don't know what is going to happen, but I do believe, more so than ever, that the Fed WILL end up lowering interest rates. Just as the Treasury only a few days ago stated they weren't bailing anybody else out, then totally reversed course and handed AIG $80,000,000,000, so too will it probably be with the Fed...Yesterday they said they weren't lowering rates? With stocks down another 450 points today, and some nasty looks to a number of other major financial concerns (Morgan Stanley and Goldman Sachs, the last two of the country's five major broker-dealers having lost roughly 50% and 25% respectively of their values in the last 3 days!) I could easily imagine a surprise rate cut, and probably a big one, being announced by the Fed at, really, any given moment...
The point of all this is, if I am right, there would be a major upside reaction in the Eurodollar contract shown below...This is not the Eurocurrency, nor does it have anything to do with Europe, nor is it a currency...This market reflects international short term interest rates, more or less tracking the interest rate on 90 Day US Treasury Bills. Like Bonds, Eurodollars go up when rates are falling and down when rates are declining. When it is at 97.00, it is reflecting a 3% 90 day interest rate on dollars deposited in banks outside the United States. If this is confusing, just know this: If the Fed were to cut interest rates by 1/2%, the contract below would probably immediately jump 75 points in a matter of minutes, literally...which is why I today started buying calls in this market...Maybe I'm wrong and the crisis we are in right now is not really a crisis, and this disaster in the financial markets is a severely overdone reaction and we are all supposed to be buying the hell out of stocks...in which case this trade will probably be a loser...But IF stocks do keep falling, I can only suppose the next thing we'll see is the market knocking off bigger chunks than the two recent 450-500 point down days...And under those circumstances, I see NO WAY for the Fed to just sit there and do nothing.
On another brief note...With today's volatility, we have tightened up stops considerably in our short soybean oil position and are now probably out of 80% of what we owned.
We have been VERY fortunate to catch two almost straight down collapses in Corn and Soybean Oil...In the Ags, however, I now see the Cattle complex, particularly the Feeder Cattle, as the next market that could be primed to roll off a cliff. Make no mistake...Just because I have been so "right" lately does NOT mean I know what is coming in any of this stuff, and cattle may be getting ready to go dead opposite my opinion...But I also would say, the Feeders resemble (to me) Corn or Soybean Oil six to eight weeks ago, and might therefore just be ready to go through the same sort of non stop sell off both of those markets just experienced...And one more time, I'll say again that this market is very close to its record highs in an economy that doesn't really argue for everybody gobbling up sirloin steaks...Also that if Crude Oil, which is somewhat more of a necessity than beef, can drop 35%, so might easily be the case with the cattle complex.
Call me if you are interested in any of this...