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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...
Thanks,
Bill
770-425-7241
866-578-1001
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