Wednesday, August 18, 2010

Is It Time To Take a Timeout from the Capital Markets?

Stanley Druckenmiller sure thinks so.   I think many others on Wall St would admit that they wish they could do the same.  Druckenmiller is a legend of the game folks.  If Wall St had a Hall of Fame he would surely be a first ballot lock to get in.

all I can say here is can you blame the guy?  The casino gambling mentality of the new Wall St traders combined with the constant government interventions has turned the markets into an absolute unmitigated disaster.

I think many of the big players have decided to pick up their toys and go home.  The question I then have to ask myself if they are doing this then shouldn't we be following them?

If the biggest names on Wall St can no longer perform at a high level how should we be expected to do any better?

The constant interventions has created a total loss of confidence in the markets.  The volumes have become anemic which then makes the market even more vulnerable to violent moves based on any news that hits the wires.

The market has looked like one gigantic roller coaster since last October for the most part:

Markets like this are very difficult for any investor to make money in.  You may find a nimble trader who has done OK in such an environment, but I guarantee you for everyone that has done well there are 10 others that have blown up their trading accounts.

Volatility like this makes it really tough.  Making matters worse, the horrific news flow around jobs and deflation has created a panic into bonds which has created even more uncertainty in the markets.

There was a lot of talk around a bond market bubble on CNBC today after Jeremy Siegel's much talked about op-ed in the Wall St Journal.  Jeremy basically compared this move in bonds to the tech bubble.

I shared similar concerns on here yesterday.  Bonds were up once again today(shocker eh?).  This parabolic move is doing nothing to help investor confidence.

The way I see it:  Investors are now paralyzed in terms of where they should be putting their money.  

Every asset class has considerable risk.  Stocks are over valued.  High yield debt pays a nice yield but the risk is with real price discovery the bonds they hold could be worth pennies on the dollar.  

Munies look good comparable to treasuries but the state deficits make these bonds risky as well.  The news out of New Jersey today certainly wasn't helpful for munies today:



Washington, D.C., Aug. 18, 2010 - The Securities and Exchange

Commission today charged the State of New Jersey with securities
fraud for misrepresenting and failing to disclose to investors
in billions of dollars worth of municipal bond offerings that it
was underfunding the state’s two largest pension plans."

When you look at all of the uncertainty out there maybe we all need to ask ourselves if it's time that we get out of this game all together.


Unfortunately, the greatest opportunities in the markets for the near future are most likely on the short side.

I wanted to end today with a little discussion around a trade that I am starting to look at as treasuries continue to soar.  I can't help but start thinking about going the other way on bonds if  the 10 year gets below 2.5%

Treasuries are beginning to look risky to many including Doug Kass who is calling this the trade of the decade(Doug's take is towards the end of the video):

My Take

I can't help but agree with Doug here.  In fact, I wanted to put up an interesting chart on TBT that I put together today:

As you can see above, TBT has now firmly broke down below where it traded when the Fed announced their QE last year.  The 10 year and the 30 year bonds have yet to do the same.

I think this makes TBT interesting here but I want to stress what Kass said above.  This is a trade that you need to scale into because there is a lot of momo in treasuries right now.

The fact that TBT has firmly broken to new lows is something to take note of.  I am a buyer here tomorrow if the 10 year dips down into the 2.5% range. 

The Bottom Line

Be aware when you see huge players like Druckenmiller exiting the market like this.  The market really has made no sense for over a year now and it's becoming increasingly difficult for even the best of the best to trade.

The bond binge has only made things even more unstable in my view.

Ironically, I pick today as a day I want to talk about trades as everyone else is throwing in the towel.  Perhaps I am a glutton for punishment but this is the first time I have seen a few things that look interesting to me.

Here is my plan: 

If we see another move higher tomorrow I am considering a pair trade where I short stocks/short treasuries.

My thinking here is a market selloff is the only way treasuries move significantly move higher from such lofty levels.  This will hedge me out of my TBT position.

I say this because I simply do not think both stocks and treasuries will continue to move up simultaneously. 

In fact, I think over the longer term we could see the exact opposite where all confidence is lost and stocks and bonds both sell off at the same time similar to 1932.  This trade becomes a big winner under such a scenario.

I will use a combination of ETF's and PUT's for this strategy.  I will be looking to use the ETF's  QID, TBT, SDS and TWM on the short side.    My PUT strategy would involve the SPY and TLT(treasuries).

There is a good chance that I will start scaling into this trade tomorrow.  I will have an update on Thursday!

Best to all and be careful:  It's a jungle out there.


getyourselfconnected said...

Good luck if you put that one on Jeff! Makes sense to me but thats the kiss of death.

I had three positions picked out and then they all started acting a little weird the last week and the absolute correlation in the markets makes me iffy on anything. What to do, what to do.

Jeff said...


I heaar you bud. I will have tight stops on the shorts.

It's gonna be small increments and a small percentage of my holdings.

Hoping for a nice bounce tomorrow. Jobless claims are going to be huge tomorrow.

Hoping for a decent number and a nice bounce tomorrow. If the market looks strong I might wait another day.

I hear you though bud. I just don't think stocks and bonds will keep going up at the same time.

Thats my key premise. I just don't see where the money comes from to prop both up longer term.

Best of luck bud.

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