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-- Posted Wednesday, 14 May 2003 | Digg This Article
Dare we say that one of the world's biggest securities markets has got it all wrong? Futures on the 30-year T-bond impaled a hidden-pivot target yesterday that we first proffered here quite some time ago. The target, 118.09, was far more bullish than we could have explained when we first advertised it months ago; nor can we explain it now. The prediction was based on purely technical factors, and we made no attempt to rationalize it based on our understanding, such as it is, of how the world works. The fact that the bonds have obliged us with a rally that few expected, and even fewer can comprehend, is rendered even more puzzling since, like most of you, we are always hoping for rates to come down so that we can refinance our mortgage at some absurdly lower rate. Did anyone actually believe, when mortgages were bottoming at 5.50% a while back, that they might go still lower, triggering off yet another massive wave of refi's? (Actually, our expert's expert, Howard Hill, did, but he was alone as far as we can recall.) Well, the next refi wave is still a little ways off, since ten-year Treasury paper must fall even lower to create the spreads needed to make mortgage lenders salivate. But the prospect of yet another refi boom is no longer remote, notwithstanding the anomalous fact of a very weak dollar. But to return to the question of whether buyers of T-bonds may have gone off their rockers, we think the answer is yes, they have, and here is why. According to the Wall Street Journal, the buyers are enthused because they are no longer worried that the Fed is going to raise interest rates, even if business should pick up. To be sure, the central bank has made clear lately that it is targeting deflation, not the old dragon of inflation, with monetary policy. Any bondholder who survived the 1970s price spiral undoubtedly has come to regard inflation as the enemy, since in dollar terms it was even more devastating to capital than the 1973-74 bear market was to shareholders. But we think they are mistaken to think, as they evidently do, that inflation's theoretical opposite, deflation, will ultimately be bullish for bonds. Their error is based on a textbook understanding of deflation, implying as it does falling asset prices, a weak economy and a strengthening dollar. But as we have pointed out here many times before, it is not a textbook deflation that has quietly been gathering power for the last decade or so, but rather one that must eventually run up against the paradox of a weak -- make that, fundamentally worthless -- dollar. The textbooks say that in a deflation, cash is king. Clearly that will not be the case this time. The standard argument to the contrary holds that the Fed's unprecedented easing of the last several years must eventually result in inflation. While it is true that the world has experienced a dollar/credit blowout of unprecedented proportions, we see the amount as puny relative to the $100Tr of global debt it has come to support. We also believe this debt can only precipitate out as deflation, fulfilling the late C.V. Myers' dictum: "In the end, every penny of every debt must be paid in full -- if not by the borrower, then by the lender." With deflation inevitable but a dollar manifestly unsuited to the role of "king," it is clear that the coming deflation will not be the anything like the one our grandparents faced, and neither will U.S.-bond holders continue to enjoy it. In the meantime, if there is a bond that we are comfortable holding, it is one that is linked to gold. [The + symbol means we have an open position, while $ means there is actionable advice.] | | 125% TUITION REIMBURSEMENT PROGRAM | | 125% TUITION REIMBURSEMENT PROGRAM: Through our partnership with Terra Nova Online, MarketWise Trading School provides its graduates with the education necessary to adapt to these volatile markets, while taking advantage of our Tuition Reimbursement Program designed to provide 125% of the graduate's tuition back to them. click here |
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Gold
JUN GOLD (355.10): A subscriber wrote to ask whether the move above 353.70 has ratcheted up our bullishness to a higher threshold. We replied that we are taking it one day at a time, and that any bullish thoughts we might ha rbor are tempered by the prospect of a strong rally in the dollar sometime soon. We gave 95 as major support for the dollar index, but a closer look suggests it could fall to as low as about 92.50 before it finds traction. Regardless, it must be inferred that the dollar is at least close to a bottom of intermediate importance, even if it is not quite there yet. So, with a potentially major bear rally in the dollar imminent, we'd advise you to rein in any thoughts you may have about a test soon of early February's $390 peak. We'd be mildly excited just to see the June contract pierce the high at 361.50 made later that month. If it does so, we'd look for a upward bias that would eventually bring gold up to $390, but over 6-8 weeks rather than precipitously.
GoldCorp (NYSE:GG)Quote - Options - News - Profile - Message Board - Website
+ GG (11.30): We hold 400 shares for an average 7.20. No change. There are two impediments immediately above – at 11.61 and 11.83 – as well as conventional resistance near 11.50 from a prior peak, so don’t expect too much from the stock.  
DURBAN DEEP (NasdaqSC:DROOY) Quote - News - Profile - Message Board - Website
+ DROOY (2.39): We hold 200 shares for 2.41. DROOY continues to hovering above a hidden-pivot support at 2.16, but if it should exceed that number by more than 3 cents, we’d infer it’s on its way down to whole-number support at 2.00. If the stock should continue higher, we would presume a minimum target of 2.55 over the near term.
+ RANGY (13.30): Again, no change. We hold 200 shares for 10.35. We see little upside potential over the near-term, although there is not much to impede the stock between here and 14.  
Royal Gold (NasdaqNM:RGLD)
$ + RGLD (18.85): We’re risklessly long the July 17.50 – May 17.50 calendar spread eight times, trying to roll into the July 17.50 – June 17.50 call spread buy covering the Mays and selling eight Junes. We'll wait till tomorrow, when we may attempt to roll into the July-June 17.50 call spread not by covering the Mays and shorting the Junes, but by buying 800 shares of stock, shorting eight June 17.50s, and letting the stock get called away by the exercisor of the May 17.50s we would still be short. If we tried this today there is risk the stock will fall below 17.50 before Friday's final bell. We could hedge ourselves by buying eight June 17.50 puts, but why waste the money? It will be worth your while, we think, to trace through the steps above so that you can understand for yourselves what we are talking about.
 
DJIA (8647.82): Just a small addition. Our upside target at 9035 remains viable in theory, but we’d reef the sails following a print at 8567.42 -- and batten the hatches at 8339. The first price is where a minor bearish "impulse leg" could form on the hourly chart. JUNE-MINI S&Ps (939.50): Yet again, the futures flirted with a 947.75 hidden pivot we’ve been using as rally target, but they fell 0.75 points shy of getting past it. If they succeed today, the next hidden pivot above it lies at 953.00. Alternatively, on weakness we'd look for the Junes to grope their way down to 929.25, a Fib level, in search of traction. JUN BONDS (118.12): The futures exceeded our longstanding target at 118.09 by half a point, suggesting that the rally has further to go. We see limited upside potential from here, but even if bonds merely back-and-fill for a couple of weeks it would be bullish for stocks -- and for a mortgage market that is explosively eager for a new wave of refi activity. OEX (473.98): We’ll stick to our minimum upside projection of 484.93, since the technical picture is unchanged, but we’ll use 458.32 as our threshold to warn of a potentially serious trend change. That is just beneath a low made on May 1. More immediately, the OEX could pick up support at 470.23 today if weakness continues. $ + QQQ (28.60): We hold twelve June 30 calls for an average 0.33. Once again, offer twelve May 30s short against them for 0.20, day order. We also hold 24 July 23 puts for an average price of 0.175. Continue to offer eight of the puts to close for 0.35, good-till-canceled. NASDAQ E-MINI (1151.00): What a tease. Without piercing it, the futures got even closer to the 1169.00 hidden pivot they'd missed the previous day by just two points. A bad sign, and we'll repeat that a print at 1094.50 would be the first sign that the bear rally begun in mid-February is in possible jeopardy. *** $ + IBM (88.70): We hold eighty July 105 calls for an average 0.13. Like several other issues tracked by Black Box, IBM made a slightly higher high on Wednesday while still managing to fail by a hair -- in this case, 0.07 points -- to push past a hidden pivot we'd flagged a while ago. We’ll continue to offer 80 June 105 calls short against our Julys for 0.10, g-t-c, but please note that the stock could fall today to at least 87.49 -- a Fib level -- before finding short-term support. FNM (72.91): Just a small change. The stock has extended its gratuitous two-point oscillations to a 21st day, leaving us uninspired and devoid of compelling ideas. C (38.90): We hold eight May 42.50 calls for 0.10, but it's time to kiss them good-bye, for a nominal, $80 loss. You can disgorge the calls at your discretion on Friday in the unlikely event that the st ock rallies sufficiently to revive them. KLAC (41.54): We're speculating for now, since we've got enough calls in other issues to satisfy our urge to speculative on a post-expiration short-squeeze. EBAY (94.63): eBay is feeling the magnetic pull of 100, but this holds no special opportunities for us. Remain on the sidelines.
-- Posted Wednesday, 14 May 2003 | Digg This Article
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MarketWise Black Box is published on weekdays 240 times per year. Copyright 2003 by MarketWise. For further information please go to www.marketwise.com. All information was gathered from sources believed to be reliable The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk s should be used for such trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
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