Friday, August 17, 2007

Flight To Insanity

For those of you not paying attention, financial markets have been in turmoil these past four weeks. The Dow has shed over 1,000 points and Nasdaq has had a near 10% correction. All of it (ostensibly) stemming from hiccups in the mortgage market.

Everything is going down, down, down. Commodities and even gold THE hedge (theoretically) against all monetary crises for the past 4,000 years.

One asset that is rising amidst this storm is the US Treasury market - and it makes zero sense.

It's deemed a "flight to quality" by sheepish clowns everywhere - but from where I sit, it's purely insane AND I am shorting heavily into it.

Let's go back to June when the long bond got smacked and its yield touched 5.40% (up from December's low of 4.50%). That idiot Bill Gross was calling it the end of a 25 year bull market in bonds. Thankfully I covered my short at that plateau (of course I re-established it at better, albeit lower than today, prices).

I agree with him in principle that bonds are about to wither and die, but in trading markets, timing always reigns supreme.

I believe this uptick in the 30-year presents the "whacking" opportunity of a lifetime. It's profoundly irrational that petrified credit buyers are fleeing one bubble (mortgages) for another, even bigger, bubble (30-years).

If Gross, and yours truly, are correct that bonds are entering a prolonged bear market, then this insane rally is begging to be shorted into - and that's what I have been doing.

I see the bond like I saw California real estate in '04-'05. Anyone not irretrievably myopic could see that "Fruit and Nut Land" was a fiscal and social disaster on the brink. Screaming real estate prices were a godsend to wise Californians looking to move out - and many did.

On other blogs I have recently made the point that the best way to play a bounce in equities is to short the long bond. I think its ceiling is firmly in place - with socialists ascendant, built-in tax increases coming (AMT, expiring low rates on capital gains and dividends, etc.), protectionism in the air, rising commodity prices, deflating housing (which is inflationary), ticking entitlement bombs,...)

Take a good look at this long term chart.

It sure makes "reversion to the mean" a very scary thought for many - although a pleasant thought for me and my fellow shorts.

1 comment:

Anonymous said...

this is the second time I've read this - good post.