Croker-Rhyne Co., Inc.

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September 25, 2008
The Bailout has become the number one subject, planetwide, with the whole situation being touted as the biggest economic crisis since the Depression, and we are consequently seeing many markets swinging madly on seemingly every word out of Washington during the past week. As such, I have little doubt the markets will not be trading sideways in the near future and I am therefore approaching all of our trades with an "ANYTHING can happen" mentality. I have my opinions, but remind myself daily that I may be dead, dead wrong about whatever I think, and with the extreme moves we are now seeing, it is of the utmost importance not to get your head blown off when you are wrong...which means sticking religiously with the "2 and 1" options strategy...There are some enormously big, fast moves taking place, and if you are lucky enough to be on the right side of them, the percentage profit gains can be quite large, but again, the first thing you have to do is play defense. The "own both sides" approach is not perfect (you can lose 100% of what you have on the table if a market goes completely sideways), but it does offer you a lot of protection/peace of mind in these HIGHLY volatile markets, while still leaving the door open for those rocket type profits we all envision with every trade we enter.
There seems to be a blanket assumption the Bailout (which will get quickly done) means we now have a floor in the stock market...that although the economic results will not be immediate, stocks are now OK, and people can stop worrying about further declines in their investment and retirement accounts...I assure you I am not just stuck on "BEARISH", but I cannot get away from the idea that the markets are never, never, ever that simple...that just because the government loudly proclaims, "We have the solution! Lots of money!", it axiomatically follows that the stock market is going to start going up...MAYBE what they are doing has raised the low I might have expected to see in the Dow, but I still think there is an excellent chance we are still headed into the 9000's.
While I do recognize that handing $1,000,000,000,000 to all the financial firms who are the real culprits in this mess (and they have gone from despair to hyper salivating) will CERTAINLY firm up those institutions, it still doesn't change the fact the American consumer is still on his knees, and probably will be for quite some time. He is still suffering from too much debt, housing values that will probably continue falling at least through the winter, high energy, health care and supermarket costs...and stagnating wages. On top of that, although lenders are getting handed all this money, it does not mean they are going to be throwing it at anybody who wants to borrow. Lending standards will be returning to what they were a decade (or more) ago and just because all the banks, brokerage houses, and insurance companies will be sitting pretty, doesn't mean the economy is going to be all greased up with easy money and ready to fly...Yes, sooner or later, the 400 year old natural economic inertia of this country will take hold and get us going again, but for the moment, I don't think it will prevent stocks from soon heading substantially lower.
Still Shorting Cattle
Similar to what we have recently seen in Wheat, Corn and Soybeans, I continue to think the cattle complex is about to roll off a cliff...As I've noted previously, Cattle are still quite close to their all time highs, and virtually all of the fundamental commentary I have seen for the past six months has been nothing but bullish, with little reference seemingly ever given to the fact demand for beef may easily be tanking right along with the economy. It's almost as if all the bullishness in the cattle industry has kept this market propped up and disconnected from reality...which does happen in this stuff, but sooner or later reality does win out...and with both Feeders and Live Cattle now hanging around contract lows, I think we could be right in front of one of the non-stop declines the meat markets are sometimes "famous" for...Believe me, according to the speculative cattle masses, by now, cattle were supposed to lifting off, NOT making new lows.
To add further perspective, the table below lists the declines, during the past year, that have occurred in EVERY major commodity traded here in the United States. This is not to say they are all down, right now, by the percentages you'll note in the "% Lost" column, but that all of these commodities, at some point during the past year, have taken a significant dive...EXCEPT for the meat complex, and most specifically, Feeders and Live Cattle. In fact, with Feeders and Live Cattle down 13% and Live Cattle down 11.7%, the SMALLEST decline outside of the meats is 23.7%, with MANY of those markets having been pounded for 30-40% losses...All of these markets have not all crashed at the same time as there are "rotations" that take place in commodities just as they do in stocks, and, all things considered, my guess is that the meats MUST be next in line. Maybe I'm wrong, and all those still bullish livestock analysts are going to be right, but I think being short both of the cattle contracts has tremendous potential.
Commodity Market Declines Last 12 Months




  %  Lost

















Crude Oil




Heat. Oil




Unl. Gas




Nat. Gas




































Soy. Oil




Soy. Meal
















Fdr. Cattle




Live Cattle




Still see Treasury Bonds a LOT higher...
And long term rates a lot lower
Bonds have been as wild as I've ever seen them. Last week prior to the Bailout announcement, blind luck led us to take profits on our 119 calls (w/ 118 puts as defense) and then immediately reinvest a small percentage of those profits in 123 calls, with 122 puts as defense. A few days later the market had dropped an astounding 6 points and we unloaded again, getting back 80-100% of what we had on the table (mostly due to our defensive puts) and we are now back to owning 119 calls with 118 puts...All of this action, and the fact we are making money under the most volatile of circumstances, makes a further argument for the "2 and 1". Believe me, when a market is moving blindingly fast and hard AGAINST you, having the defense definitely makes it a lot easier to make rational trading decisions, as opposed to those we've all made when losing big and scared silly...
In the past few days, I have heard various talking heads making the same old bearish analysis that "foreigners may decide to sell their US Treasuries any day now", or "foreigners may completely stop buying our treasuries", and as a result, our long term rates could go screaming higher. Aside from the fact this is the same thing those people were saying three months ago when bonds were just getting started on a 12 point upswing, I'd also make the point that the WORLD is following us, waiting to see what we do, waiting to see what happens this country is still the economic kingpin of the planet. This is STILL the place that everybody wants to have a piece of, and US Government Securities are still the number one "flight to quality" instrument on the international investment scene...I'd also add that most of those same analysts (which is about all of them) who have been bearish bonds are the same people who were predicting a US Dollar collapse right up until a few months ago when it exploded up 10% (a stout move), which, by the way, added 10% to the return on any Treasury Bonds those supposedly disenchanted foreign buyers might have recently purchased...Make no mistake. With the state of the equity markets, Fixed Income is a lot more appealing all over the world than it used to be...and I wouldn't expect that to change for quite some time...and I believe there will be no shortage of buyers for any long term US Government Treasury Bonds, however much we want to sell.
I could throw out a number of other reasons why I think bonds are still headed a lot higher (Housing, for one) but I'd just be repeating what I've written in previous newsletters. If you're interested, go to our website newsletter archives and look for any references to Treasury Bonds.
For the near term, we are still long and looking for new highs to be made (again).
And after tightening up our stops, we exited Soybean Oil last week...
That's enough of my drivel...My main focus is obviously to be short Cattle...Give me a call if you're interested or if you have ideas of your own you'd like to explore.
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