Long Bonds at Resistance

30-yr Bond futures have climbed back amidst negative economic data indicating that the Fed will cut rates again this year. Moreover, the Fed announced this morning that its inflation measure matches forecasts, pushing bonds higher. But with silver, gold, and crude oil beating historical highs with never before seen prices, inflation seems far from under control, and I think the rally in long bonds is overdone. Inflation expectations and potential record highs in the stock market should send the 30-yr below 110 in the coming weeks.

[Bond futures: one-month chart]

Steepening YCRV

Bond prices have climbed back since last week, and this morning's negative economic data (existing home sales, consumer confidence) releases provided a bullish case as a safe haven. But sellers stepped in during the afternoon, erasing the day's gains. It seems that today's negative economic data gave support to Bernanke's rate cute decision, and made further rate cuts this year seem more likely. This only means that there will be more inflation created to sustain the housing problem, which is far from over. The market seems to be more concerned about inflation, downplaying bond's role as a safe haven. It will be interesting to see how long bonds react to this week's economic data releases (durable goods, GDP, new home sales etc.) which will most likely turn out to be negative.

No hurricane, but technically bullish

Here is a chart of NOV07 natural gas which became the front month K today. There seems to be a potential inverse head and shoulders formation, indicating a bottoming. Moreover, relative strength has been increasing steadily while natural gas made multi-year lows. A rough hurricane season and colder than expected winter can also facilitate a move through $8 to test the $9 level.

Hurricane coin toss

Since falling from $8.5, natural gas has been trying to find a bottom (low: $5.25). Natural gas has recently formed what seems to be an inverse head and shoulders pattern (not shown here), with a very pronounced support/resistance at $6, as shown below (also the right shoulder of the pattern). I have missed a couple opportunities to play the natty roulette at $6, and it looks like I finally have a chance.













Making things more interesting is a potential hurricane development in the Gulf of Mexico, and whether this system develops into a serious threat depends on which course it takes, as shown below. The strength of the potential hurricane is directly correlated to how long the system hovers over the currently warm sea waters. I'm betting that the system will float west and develop into a hurricane significant enough to nudge natural gas prices higher. Although natural gas is heavily weather/inventory driven, it has not really participated in the broad inflationary rally in commodities, and it will be interesting to see how it performs in the coming weeks.

Fear of inflation

Today was an exciting day. Silver made a a very strong run to finish at roughly $13.6/oz, but the most exciting move came from bonds; just compare the chart below to yesterday's chart.

The day after B-52 Bernanke...

Well Bernanke showered upon us a chunky 50 BP cut, and the markets responded swiftly. After a brief volatile gyration, gold, silver and FX began making strong gains. Gold is at record high's (you'd have to look back many years to match today's high), but because silver is still shy of May 2006 high's, it is easier to estimate resistance levels. Since last year, I incorporated a concept called "Box Theory", and looking at the silver chart below, once could detect a roughly $0.400/oz box range. Today silver is at the top of a box (yesterday's high), and it is a matter of time before we see a trend of boxes on top of another.

Considering that Bernanke has just unleashed significant inflation upon the markets, as shown in record commodities and FX prices, we are bearish long term bonds. Bonds have rallied significantly since August, and a bearish triangular formation has formed over the past couple of weeks; most likely just in time for a sell-off in fear of unexpectedly higher inflation.

Much needed crack, I mean cash

I am back from a very long break (working as a summer associate at Linklaters, structuring CDO's that people won't see again for a long time, moving out of dirty Brooklyn and moving into pretentious Soho, traveling to a paradise island in Thailand etc.) By the way, what better day to recommence trading than today's Bernanke festival? The market has been addicted to easy credit for the past 5 years, and today Bernanke must give the market its much needed fix.

Today is the big day everyone has been waiting for: B-52 Bernanke (a la Puplava) is about to unleash piles of cash over the markets. When the subprime/credit crisis really began to reveal itself in August, most people had no doubt that the Fed would slash the fed funds rate by at least 50 basis points. Since then, the Fed has undergone a massive reinflation campaign by lowering its discount rate and exchanging almost any piece of crap for cash, thus providing much needed liquidity into the financial system. By doing so, the Fed has technically already lowered the fed funds rate by 25 basis points and injected inflation into the markets. In recent weeks, we saw gold make new highs, silver make a strong comeback, and crude reach a record high. This trend became more pronounced when precious metals began moving independent of stock performance in the past few weeks.

With inflation indicators at record highs, many people recently became wary of whether the “academic and inflation fighting?” Bernanke would indeed cut 50 basis points. But we’re talking about B-52 Bernanke here, and he is certainly not an inflation fighter. The central bank is constantly on a PR campaign to establish itself as an inflation fighter, but in reality, the central bank is the sole creator of inflation and the market depends on it more than ever. Recent fear of an "excessive" rate cut will actually provide the Fed today with room to make a 50 BP cut and beat market expectations.

So what should one buy and sell? Obviously, we are very bullish on gold and silver. Unfortunately, silver has been lagging behind gold (silver is still $2 shy of its 2006 high), and some are doubting the performance of silver, citing reasons like decreasing industrial demand. But watch out for silver, as I will begin following silver very closely.

Feels great to be writing again!!!