Friday, October 26, 2007

Trade Suggestion

Usually, when the really good, "no-lose" trades come up, my position is already so big that I can't add to it. That is the case now. Along these lines, I knew a veteran trader who always put his "5th buy" in his Keogh. Despite paying Merrill Lynch a sodomizing .09 per share in commissions, his retirement account grew by leaps and bounds.

I have been bearish on, and short, the 30-Year Treasury for a couple months now. I am down a good four points. If I was flush, I would hit it with a baseball bat today. Here's my reasoning:

The stock and bond markets have exploded since the August "credit crunch". As I have blogged on before, market participants are all betting on more rate cuts from the political animal (Bernanke) that runs the Federal Reserve. There's no doubt in my mind that another 50 basis point cut is baked into both stocks and bonds.

Here's the wrinkle: oil just shot up to $92 per barrel today and the dollar is at a new multi-decade low. These are the only developments that MIGHT prevent those inflating idiots from dropping rates to "save" an unsalvageable housing market.

Ergo, markets shouldn't have a 100% likelihood of a cut priced in. Oil could very easily be $100 next week and this dollar weakness could cause an international run on our currency. As much as these politicians would like to artificially prop up asset prices, Bush's poll numbers, and their perceived re-election chances, they may in fact be forced to stand down and do something they've never endeavored before. They may have to sit back and do NOTHING. What a notion!

That's why I see shorting the long bond as very good bet TODAY.

For my mind it sets up as an ideal trade.
  • My best trades in the past 12 months have been shorting sharp upticks in the long bond. My first whack came when the clowns bid it up after the '06 election victory of the socialists. The second time was this past March when it popped to just about these same levels for seemingly "no reason". A good trader sticks with what's worked.
  • I believe the long bond is tired and at the end of a multi-decade uptrend. It's been ignoring ubiquitous inflation since 1998. In the old days, all it cared about was inflation. $90 oil and $10 soybeans should at least take a bite out of bond euphoria. So without even talking about the built-in tax increases and ticking entitlement bombs I see plenty of fundamental weakness to comfort me on the short side of bonds.
  • And as I mentioned above, there has been, what I perceive as a ridiculous, non-sensical move in bond prices. There's nothing more salivating than an insane uptick in a downtrending security. This not only gives an ideal entry point, it usually provides a rapid profit.
Summing it up, I am confident then that I have timing, fundamentals, and a good entry point all on my side. The risk/reward proposition seldom looks more actionable.

One can short the futures with very little money down. It's a 113 dollar number with minimum increments of $100,000. In other words, if you short one contract at 113 and buy it back at say 109, you would make $4,000, that would be one grand per point. To put it perhaps more simply, shorting one future's contract would be like shorting 1,000 shares of a 113 stock.

BUT, to short 1,000 shares of a 113 dollar stock one would need at least 50% of it as margin, i.e. $56,500. Whereas, shorting a long bond future only requires something like $2,000 worth of margin. (I would recommend you have $5,000-$6,000 as your mental "loss" provision).

So shorting the long bond is a cheaper, less risky way for the small investor to play the commodity bull market.

I will revisit this trade suggestion, hopefully very shortly and at lower prices.

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