The wave of cash that flowed into U.S. Treasurys late last week should serve to remind us of the myriad ways investors can profit by betting on a rise in T-bonds prices and a corresponding decline in yields (details below). All it took to set these flows in motion on Friday was some unsettling news from Ukraine. What was the news? That’s the point. Whatever it was, it barely registered on a global-crisis scale so weary of horrifying headlines that no story, no matter how ugly, stays above the fold for more than a few days. Even so, the news from Ukraine was sufficient to coax idle cash from around the world into U.S. debt paper. Just imagine what would happen if a real crisis unfolded. » Read the full article
The broad averages ratcheted their way to marginal new highs yesterday, but the lunatic stocks –Priceline, Netflix, Google, Tesla et al. — were a noticeable drag. Which will win the tug of war as the week ends? My guess is that the weakness of the latter will pacify short-covering bears, at least for the moment, restraining the stock market from making significant gains. Watch for an overly ambitious opening bar in the Dow and S&Ps, since it could be setting up a bull trap.
The bearish pattern shown makes clear where December Gold is headed, and the weight of it looks too great to suggest that any other outcome is possible. With the stock market eking out new record highs each day, interest in bullion is on the wane. However, although gold (and silver) may act dispirited, there is little technical evidence of an impending rout. For that reason, I would encourage you to bottom-fish aggressively at the 1257.70 target, albeit with a very tight stop-loss.
Subscribers are working two bullish calendar spreads (x16), but I would suggest increasing the size of the position if TLT corrects down to the 115.18 target shown. For now , we are long September 20 118 calls against short August 19 118 calls that we will roll into August 29 calls this Thursday and Friday. We’ve already done the roll twice, reducing the cost basis of the spread to 0.04. This week’s roll will entail covering (buying back) the short calls and shorting a like number of August 29 calls, effectively selling the August 22 118/August 29 118 calendar spread.
It was marked on Tuesday at 0.17, off a 0.26 offer, but any price higher than 0.04 will effectively turn the position we’ll have – long the Sept 20 118/August 29 118 calendar — into a credit spread. This means we can’t lose – will make a profit no matter what TLT does. Ideally, come September 20 , TLT will be sitting at 118, our spread will be trading for around 0.50, and we’ll be carrying it for a credit of perhaps 0.50. The imputed profit would be $1600 — not bad, considering our risk is already close to zero.
My long-term outlook for T-Bonds is very bullish, a view that goes sharply against a consensus which clings to the belief that interest rates – and the stock market — can only go up. That is a bet we should be eager to fade. We may have a chance to do so at still better odds if T-Bonds continue to sell off on the manufactured idea that the Jackson Hole conference will open the floodgates for more stimulus and inflation. _______ UPDATE (10:38 a.m.): The Sep 20/Aug xx calendar spread is recommended at this point only for those who did the original spread, since there’s not enough time left on it to roll its cost basis down to zero or less (i.e., a credit). If you are new to the spread, try buying the Nov 20/August 29 calendar for 0.90 with TLT trading around 115.80. The spread has a delta value of 0.20, implying that being long one spread is equivalent to being long 20 shares of stock. This means that, using a spread price of 0.90 as a benchmark, you should adjust the price you pay for it by one penny, up or down, for each 5 cents that TLT moves away from 115.80.