2009

February 12, 2009 · Posted in Membership, Weekly Posts · Comment

Over the past couple for days we have seen gold rise strongly while bond yields have declined. Gold has helped our positions whereas the rise in bond prices has hurt our TBT and PST positions. Let’s look first at the technical charts for PST and TBT and then discuss some of the background fundamentals that are at work.

First the chart for PST - the 7-10 year US Treasury Bond Leveraged short:

PST Mid-Day 02/12/2009

As can be seen at this point PST appear to have come back to it’s 50 day moving average. Critically, the range of $54-$55 is a region where PST reversed after the first run-up in early January and where it paused before moving higher in late January. If PST holds above this region then there is a good chance that we have seen a floor in prices. We are watching this closely with a view to adding to our positions in this range.

Looking next at the TBT chart:

tbt021209 We see TBT above it’s 50 d moving average but again, pausing above the $45 point where it consolidated on the recent run up. Again, if we can hold these levels we will look to add to positions.

Now, what drove the sell-off? As we discussed in an earlier post the market is very concerned about the willingness and ability of buyers to absorb the large levels of Treasury securities that will be sold this year by the US government and indeed by many foreign governments. The bond auction in January was not well attended. Rates moved down ahead of this weeks auction on fears of Fed intervention and Geithner’s speech. The broader market believes that rates will go higher and significant, savvy investors believe that the US Treasury market is a massive shorting opportunity - but they are afraid of Fed intervention.

So what happened: The auction went well with strong participationin the 10 year though the 30 year showed weakness. Geithner’s speech was poorly received. The markets and most analysts worldwide believe that the Treasury/Fed plan will do little to restart economic activity, and will draw out the recession. In response the market focused on the likelihood of poor economic activity going forward and so lowered bond yields. This is a short term reaction.

Longer term what is happening? First the longer the recession, the larger the deficits are that the US will run and the more bond issuance will be needed. This is a big negative for interest rates longer term. We discuss this in our Members Only Post “The Fed and The Bond Market - Will Intervention be Effective?”

Secondly, the Geithner plan has the Fed and Treasury increasing substantially their participation in the mortgage market. This is a direct attempt to drive mortgage rates down. It is highly likely that the Fed will let this play out before attempting direct purchases of Treasuries.

Finally, how come the auction went so well? Murdock Global Insight believes that foreign participation in the auction was a gesture of goodwill to lay the groundwork for a dialogue between China and the US on the state of our fiscal position and the stability of the dollar. China stated this week that they were looking for assurances that their large holdings of US Treasuries would not suffer a precipitous drop in value due to our dollar falling. At the same time the ECB raised the concern that investors would lose confidence in government debt. So at the same time that they are buying Treasuries and ensuring that the auction went well, the Chinese are telling us “look, your fiscal policies are going to ruin you. We want to buy your bonds but we can’t increase our buying to support your problem and we can’t take the risk of losing our investment if you devalue”. This should be taken as a good trading partner expressing their concern rather than as a threat. Our economies are linked and reliant on each other.

The conclusion then is that the fundamental forces at work which will drive bond yields substantially higher are still in place and may actually have been strengthened by the poor Treasury bank rescue plan. What we saw this week in bonds is a healthy correction in the market. We need to pay particular attention to comments coming from China, Japan, and Europe regarding the size of our deficits and our response to the fiscal crisis. What we believe we are seeing is our major trading partners telling us diplomatically that they are questioning the path we are on. They are doing this before altering their buying. Interestingly Bill Gross of PIMCO sold Treasuries in January in favor of higher yielding mortgage backed securities. Once concern for our Treasuries starts getting repeated in the markets we will see the start of a more serious decline in prices.

For further analysis of the likelihood and consequences of the Fed directly intervening in the Treasury market, please see our Members Only post:“The Fed and The Bond Market - Will Intervention be Effective?”. For those of you who are not members or who have not availed themselves of the Free 1 Month Trial we urge you to do so. Simply go to the “Become a Member” tab and follow the step-by-step instructions.

We Stated on Sunday:

>Going into the new week we see precious metals and our short US Treasury positions showing similar price and volume action - that is, both are testing resistance levels, both are exhibiting higher volume on up days and lower volume on down days, both look like they are poised to move higher on news. We expect that the bond auction this week and the announcement of the administrations plan for reviving the banks will provide the stimulus for those positions to move higher. We will look to add to each of these on any pull back from these levels or on a breakout should that occur before a pullback.<

Coming Up:

We published our Members Only Post China: Part 1 dealing with how to time the entry point into the Chinese equity market.

We will be publishing a Part 2 on the currency and treasury market issues in a few days.

We recommend the following posts as especially relevant at the moment:

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends

“How a Reserve Currency Collapses”.

“Gold - Reluctantly”

“Why is the Dollar Going Up (and When Will it Stop)”

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

We are entering a critical period of time in the bond and dollar markets staying plugged into what is happening and the likely ramifications is especially important now - stay informed with Murdock Global Insight.

We hold the following positions as of 02/12/2009.
Short Treasury Bonds through PST and TBT*
Long gold and silver bullion through CEF
Long gold mining stocks through TGLDX
Long Agricultural commodities through RJA
Short US dollar through UDN**
Long Australian dollar through FXA**

*ProShares leveraged short ETF. Investors need to understand thoroughly the risks associated with these leveraged products in light of their personal investment needs and risk tolerance. They may not be suitable for all investors.

** Position is currently in loss but we are sticking with it as we believe the fundamentals will drive the dollar substantially lower.