This is the precept by which I have lived: Prepare for the worst; expect the best; and take what comes. Hannah Arendt, philosopher
Man this market is a crap shoot! Smoke and mirrors. It is choppy, scary, ugly, and I am getting down right nervous about the release of the GDP numbers later this morning. Like I said earlier this week we seem to have 3 or 4 days of hallelujah, followed by 3 or 4 days of doom and gloom. Right now we are feeling the gloom as there is clearly a lot of uncertainty over the economy right now.
Yesterday we saw red as the indices dropped on increased volume, but that doesn’t tell the whole story. It was an all out battle between the bulls and bears and it was down right ugly. We started out with a jump up from lower than expected initial jobless claims, then we had a flap from trading in CISCO that stopped trading sending jitters throughout the market, which was soon followed by negative responses from 2 Federal Reserve presidents (one compared our future to that of Japan, the other was taking shots at our politicians for a lack of consistent direction from Washington). Then I was watching “The View” last night just to see what all the hype was about. The President was adamant that things are getting better. I hope he is being sincere on that and not just playing politics. And I couldn’t help but wonder if that Fed Prez that made those comments will still have a job much longer…………?
Currently we are starting to trend down in the S Fund, and kind of sideways in the C, F and I. You can feel the market’s anticipation for the release of the GDP numbers. But remember, even though the release may dictate the out come of today’s trading, GDP numbers are a lagging indicator. We need to try and gauge what is coming more than where we’ve been. I will post the chart as soon as it the government releases the results.
Here is a quick summary of what I’m seeing right now on the TSP charts:
C Fund – Is currently holding near the 200 day moving average. Had a nice run for about 6 days, and has been showing weakness over the last 3. I think we need the S&P 500 to hit and hold above the 1130 level to call this a sustainable uptrend. While I am trying to remain optimistic, the anticipation of what is to come is weighing on me.
S Fund – This is the worse of the TSP funds right now as it is clearly starting to trend down. The 50 and 200 day moving averages are actually kissing right now, and the S Fund closed right above this area. Hopefully the two moving averages will provide a basis of support and keep the S Fund from going lower. It is also the only fund I am long in right now (25% of assets).
I Fund – The I Fund has been trending up rather nicely but is now encountering resistance at its 200 day moving average. It will need to break this point to move higher, but don’t be surprised if it doesn’t make a slight pullback here off the resistance.
F Fund – It appears to be trending sideways now, but over all the trend remains strong.
Speaking of the F Fund brings me to my next topic. Are treasuries over bought? If you are buying U.S. Treasuries for the long-term………read this article posted on
The Diary of a Mad Hedge Fund Trader: July 29, 2010 – It’s Time to Revisit TBT (
http://www.madhedgefundtrader.com/)
Shorting the world’s most overvalued asset, the 30 year US Treasury bond, has got to be the big trade from here. The relentless whirring of the printing presses is so loud that they keep me awake at night, even though, according to Mapquest, I live 2,804.08 miles away. What will be unique with this meltdown is that it will be the first collapse in history of a bond market in a non-inflationary environment.
It is not soaring consumer prices that will execute the coup de grace to the long bond. It will be the sheer volume of issuance. The Feds have to sell nearly $2.5 trillion of debt to cover a massive budget deficit and refund maturing paper, easily the largest cash call in history. Bring in a double dip recession and a second, larger stimulus package, and those numbers ratchet up considerably.
Pile on top of that trillions more in offerings from states and municipalities that are bleeding white. By the end of 2010, total government debt from all sources will rocket to a staggering 350% of GDP. Throw in private debt requirements, like the rolling over of a trillion dollars worth of commercial real estate financing and your garden variety corporate offerings. The rush to borrow has started overseas too, with hundreds of billions of dollars more in Eurobonds floated by cash strapped sovereigns like the PIIGS. It’s clear that the bond markets of all descriptions are going to become very crowded places, driving rates irresistibly higher.
At some point, the world runs out of buyers, and the long bond yields will begin their inexorable climb from the current, ridiculously low 4.10% to 5.5%, 6%, and higher. Even Moody’s is talking about a ratings downgrade for the US debt, not that we should give that disgraced institution any credibility whatsoever. The unfortunate camel whose back is on the verge of breaking is about to have sticks come raining down upon him.
I am a worshipper of the TBT, a 200% bet that long bonds are taking the Lexington Avenue Express downtown. I managed three round trips in Q1 covering the $46-$51 range before a flight to safety bid stopped me out in April. It has clawed its way back up from $34.80 to $37.15, compared to the $70 it traded at in 2008. Falling interest rates have a silver lining in that the annual cost of carry for this leveraged ETF has dropped appreciably, from 10.5% to only 8.2%.
If short interest rates double from the current levels, a virtual certainty, so does America’s debt service, from the current 11% to 22% of the budget. This could happen as early as 2014. That’s when the sushi really hits the fan.
If I’m wrong on this and the 30 year bond prices surge to a yield of 3% in some sort of second Great Depression scenario, as they did last year, the TBT will drop down to the high $20’s. If I’m right, the final target could be as high as $200, when long rates top 13%. That’s where they were when I bought my first coop on Manhattan’s Upper East Side in 1981. If you have a serious pair of cajones on you, take a look at the 3X short ETF (TMV) with its higher cost of carry.
A 20% downside risk and a 540% upside potential sounds like a good risk/reward ratio to me. If the TBT dips again in August, it might be time to take another bite from the apple.
Other articles I found interesting:
Do You Believe in Technicals or Fundamentals?
Debt-Laden Belgium's Finances Questioned (
http://www.cnbc.com//id/38441961)
S&P to Hit 1300 by Year-End: Portfolio Manager (
http://www.cnbc.com/id/38428897)
Markets Will Rise—Because Economy Is Recovering: CIO (
http://www.cnbc.com/id/38429651)
S&P 500 ETF may be sending bearish signal
Even With Stocks Rallying,
Here's How You Know Investors Are Still Pretty Nervous
No Sales Means No Jobs Means No Recovery
Why Keynesian Economics Is Internally Inconsistent
Consumers to Stay 'Gloomy' Till December: Economist (
http://www.cnbc.com/id/38430086)
