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The Bond Crash Has Only Just Started

When I was a little kid in the early 1950?s, my grandfather used to endlessly rail against Franklin Delano Roosevelt. The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died in the wool Republican, said the former president was a dictator and a traitor to his class, who trampled the constitution with complete disregard. Hoover, Landon, and Dewey would have done much better jobs.

What was worse, FDR had run up such enormous debts during the Great Depression that not only my life would be ruined, so would my children?s lives. As a six year old, this disturbed me quite a lot, as it appeared that just out of diapers, my life was already pointless. Grandpa continued his ranting until a three pack a day Lucky Strike non-filter addiction finally killed him in 1977.

What my grandfather?s comments did do was spark in me a permanent interest in the government bond market, not only ours, but everyone else?s around the world. So what ever happened to the Roosevelt debt?

In short, it went to money heaven. And here I like to use the old movie analogy. Remember, when someone walks into a diner in those old black and white flicks? Check out the prices on the menu on the wall. It says ?Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.?

That is where the Roosevelt debt went. By the time the 20 and 30 year Treasury bonds issued in the 1930?s came due, WWII, Korea, and Vietnam ?happened and the great inflation that followed. The purchasing power of the dollar cratered, falling roughly 90%, Coffee was now $1.00, a hamburger $2.00, and a Steak $10.00. The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.

Who paid for this free lunch? Bond owners, who received, minimal, and often negative real, inflation adjusted returns on fixed income investments for three decades.

This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, and then repaying the debt in devalued currency. This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.

The really fascinating thing about financial markets so far this year is that I see history repeating itself. Owners of bonds have had a terrible start, and things are about to get much worse.

The 30-year Treasury bond suffered a 3% loss in January. That means it has already lost its coupon for the year. Bondholders can expect to receive a long series of rude awakenings when they get their monthly statements. No wonder Bill Gross, the head of bond giant, PIMCO, says he expects to get ashes in his stocking for Christmas this year.

The scary thing is that we could be only six months into a new 30-year bear market for bonds that lasts all the way until 2042. This is certainly what the demographics are saying, which predicts an inflationary blow off in decades to come that could take Treasury yields to a nosebleed 18% high. That scenario has the leveraged short Treasury bond ETF (TBT), which has just leapt from $59 to $69, soaring all the way to $200.

Check out the chart below, and it is clear that the downtrend in long term Treasury bond yields going all the way back to April, 2011 is broken, and that we are now headed substantially up. The old resistance level at 1.95% now becomes support. That targets a new range for bonds of 1.90%-2.40%, possibly for the rest of 2013.

There is a lesson to be learned today from the demise of the Roosevelt debt. It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra low interest rates, and spending it all.

If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target. Here is my shopping list:

$1 trillion ? new Interstate freeway system
$1 trillion ? additional infrastructure repairs and maintenance
$1 trillion ? conversion of our transportation system to natural gas
$1 trillion ? construction of a rural broadband network
$1 trillion ? investment in R&D for everything

The projects above would create 5 million new jobs and end the present employment crisis. Who would pay for all of this? Today?s investors in government bonds, half of whom are foreigners, especially the Chinese and Japanese.

Whatever happened to my life? Was it ruined, as my grandfather predicted? Actually, I did pretty well, as did the rest of my generation, the baby boomers. My kids did OK too. Grandpa was always a better historian than a forecaster. But he did make a fortune in real estate, betting on the inflation that always follows borrowing binges.

Grandpa (Right) in 1916 Was a Better Historian Than Forecaster

The Muni Bond Myth

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Have I seen this movie before? Four years ago, analysts were predicting default rates as high as 17% for Junk bonds in the wake of the financial meltdown, taking yields on individual issues up to 25%.

Liquidity in the market vaporized, and huge volumes of unsold paper overhung the market. To me, this was an engraved invitation to come in and buy the junk bond ETF (JNK) at $18. Since then, the despised ETF has risen to $41, and with the hefty interest income, the total return has been over 160%. What was the actual realized default rate? It came in at less than 0.50%.

Fast forward to two years ago (has it been that long?). Bank research analyst Meredith Whitney predicted that the dire straits of state and local finances will trigger a collapse of the municipal bond market that will resemble the ?Sack of Rome.? She believed that total defaults could reach $100 billion. This cataclysmic forecast caused the main muni bond ETF (MUB) to plunge from $102 to $93. Oops! That turned out to be one of the worst calls in the history of the financial markets. But the fees she earned making such a bold prediction landed her on Fortune?s list of the wealthiest women in America.

I didn?t buy it for a second. States are looking at debt to GDP ratios of 4%, compared to 100% for the federal government. They are miles away from the 130% of GDP that triggered distressed refinancing?s by Italy, Greece, Portugal, and Ireland.

The default risk of muni paper is being vastly exaggerated. I have looked into several California issues and found them at the absolute top of the seniority scale in the state's obligations. Teachers will starve, police and firemen will go on strike, and there will be rioting in the streets before a single interest payment to bond holders is missed.

How many municipal defaults have we actually seen in the last 20 years? There have only been a few that I know of. The nearby City of Vallejo, where policemen earn $140,000 a year, is one of the worst run organizations on the planet. Orange County got its knickers in a twist betting their entire treasury on a complex derivatives strategy that they clearly didn't understand, sold by, guess who, Goldman Sachs (GS). The Harrisburg, PA saga continues. To find municipal defaults in any real numbers you have to go back 80 years to the Great Depression. My guess is that we will certainly see a rise in muni bond defaults. But it will be from two to only a dozen, not the hundreds that Whitney is forecasting.

Let me preface my call here by saying that I don?t know much about the muni bond market. It has long been a boring, quiet backwater of the debt markets. At Morgan Stanley, this is where you sent the new recruits with the 'C' average from a second tier school who you had to hire because his dad was a major client. I have spent most of my life working with top hedge funds, offshore institutions, and foreign governments for whom the tax advantages of owning munis have no value.

However, I do know how to use a calculator. Decent quality muni bonds now carry 3% yields. If you buy bonds from your local issuer, you can duck the city, state, and federal tax due on equivalent grade corporate paper. That gives you a pre tax yield of 6%. While the market has gotten a little thin, prices from here are going to get huge support from these coupons.

Since the tax advantages of these arcane instruments are highly local, sometimes depending on what neighborhood you live in, I suggest talking to a financial adviser to obtain some tailor made recommendations. There is no trade for me here. I just get irritated when conflicted analysts give bad advice to my readers and laugh all the way to the bank. Thought you should know.

There are two additional tail winds that munis may benefit from in 2013. No matter what anyone says, your taxes are going up. Balancing the budget without major revenue increases is a mathematical impossibility. That will increase the value of the tax-free aspect of munis. A serious bout of ?RISK OFF? that sends the Treasury market to a new all-time high, as I expect this summer, will cause munis to rise even further.

Perhaps the best way to play this area is through the Invesco High Yield Muni A Fund (ACTHX), which boasts a positively Olympian 5.56% tax-free yield.

This is Not the Muni Bond Market

Bonds are Breaking Down All Over

Diary, Newsletter

It looks like the Great Bond Reallocation of 2013 is real. The Treasury bond market is getting absolutely hammered this morning, the ten-year yield breaching 2.00%. That smashes the 1.40%-1.90% band, which has imprisoned the bond market for the past year.

The immediate trigger was the release of absolute blowout December durable goods figures this morning. They came in at a red hot 4.6%, versus an expected 2.0%. It is clear that companies are ramping up capital investment and hiring, now that the shackles of the presidential election, the fiscal cliff, and the debt ceiling crisis, have been thrown off. We?ll see the other shoe fall on Friday, when the January nonfarm payroll is released, which collapsing weekly jobless claims are predicting will be surging as well.

Cash flows into equity mutual funds and ETF?s for January have already exceeded $55 billion, and will easily close out the month as the largest in history. Yet, the move has been so fast, going up virtually every day this year, that many investors have been left on the sidelines.

Much of this money is coming from cash accounts that were topped up during the tax loss selling at the end of 2012. But there is no doubt that a major chunk is now coming out of bonds. That is what the market is screaming at us loud and clear today.

I don?t expect an immediate bond market crash here. We?ll more likely see a move up to a new trading band of $1.90%-$2.50%. So there is plenty of time to trim back positions. But the long build up here is so gargantuan, it could take 20-30 years to unwind, as it did last time, from 1948. The message here is that you should be slamming every bond market rally for the rest of 2013.

I am posting yesterday?s yields from a range of high yield instruments so I can look back on my own website in five years and see how insanely low they once were.

(TLT) ? 2.66% iShares Barclays 20+ Year Treasury Bond ETF

(MUB) ? 2.89% iShares S&P National AMT-Free Muni Bond ETF

(LQD)? - 3.83% iShares iBoxx $ Investment Grade Corporate Bond ETF

(HCN) ? 4.70% Health Care REIT, Inc.

(AMJ) ? 5.35% JP Morgan Alerian MLP Index ETN

(JNK) ? 6.78% SPDR Barclays High Yield Bond ETF

Trade Alert Service Blasts to New All Time High

Diary, Newsletter

The Trade Alert Service of the Mad Hedge Fund Trader posted a new all time high today, pushing its two-year return up to 66%. The Dow average booked a miniscule 12% gain during the same time period. The industry beating record was achieved on the back of a spectacular January, which so far had earned readers a mind blowing 10.92% profit.

Right after the January 2 opening, I shot out Trade Alerts urging readers to take maximum long positions in the S&P 500 (SPY) and the Russell 2000 small cap index (IWM). Later, I piled on longs in copper producer Freeport McMoRan (FCX) and American Insurance Group (AIG). I balanced these out with aggressive short positions in the Treasury bond market (TLT), and the Japanese yen (FXY), (YCS). Only my position in Apple (AAPL) has cost me money this year.

After grinding around just short of the previous top for four tedious and painful months, the breakout was certainly welcome news for many. Once I wracked up an unprecedented 25 consecutive profitable trades over the summer, things went wobbly. The Fed unleashed an early, surprise, pre election QE3. Then inventors stopped drinking the Apple (AAPL) Kool Aide en masse. The extent of the tax loss selling after the Obama win was also a bit of a shocker. Maybe I should take longer vacations.

Then the ?aha? moment came. I concluded at the end of November that the multiple political crises facing us were nothing more than hot air. This meant the risk markets were poised to launch multi month bull runs to new all time highs, and I positioned myself, and my followers, accordingly. In the end, that is exactly what we got.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011 and 14.87% in 2012. The service includes my Trade Alert Service, daily newsletter, real-time trading portfolio, an enormous trading idea database, and live biweekly strategy webinars. To subscribe, please go to my website at www.madhedgefundtrader.com, find the ?Global Trading Dispatch? box on the right, and click on the lime green ?SUBSCRIBE NOW? button.

QE3 Blows Out Bears.

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The big surprise today was not that the Federal Reserve launched QE3, but the extent of it. ?For a start, they moved the ?low interest rate? target out to mid-2015. ?They left the commitment to bond-buying open-ended. ?The first-year commitment came in at $480 billion, in-line with previous efforts.

Reading the statement from the Open Market Committee, you can?t imagine a more aggressive posture to stimulate the economy. ?You have to wonder how bad the data that we haven?t seen yet is, not just here, but in Europe and Asia as well. The big question now is: ?Will it make any difference??

Asset markets certainly bought the ?RISK ON? story hook, line, and sinker in the wake of the Fed action. ?Gold leapt $30, the Dow soared 200 points, the dollar (UUP) was crushed, the Australian dollar (FXA) rocketed a full penny (ouch!), and junk bonds (HYG) caught a new bid at all-time highs. ?The real puzzler was the Treasury bond market, which saw the (TLT) fall 2 ? points. ?I guess this is because the new Fed buying will be focused on mortgage-backed securities at the expense of Treasuries.

I knew that if they were to do anything, it would be aimed at the residential real estate market, which has been a thorn in their side for the last five years. ?The reason we have 1.5% growth instead of 3% is real estate. Real estate is the missing 1.5%.

But what will be the impact? ?Some $480 billion of buying of mortgage-backed securities over the next 12 months will lower the 30 year conventional mortgage from the current 3.70%. ?But all that will do is enable those who refinanced for the last two years in a row to do so a third time. Those who are underwater on their mortgages and have only negative equity to offer banks as collateral will remain shut out. ?This will generate a big payday for mortgage brokers, but won?t trigger any net new home-buying which the economy desperately needs.

The harsh reality for the housing market is that the demographic headwind of downsizing baby boomers is so ferocious that the Fed is unable to piss against it. Here is the problem:

*80 million baby boomers are trying to sell houses to 65 million Gen Xer?s who earn half as much

*6 million homes are late or in default on payments

*An additional shadow inventory of 15 million units overhangs the market owned by frustrated sellers

*Fannie Mae and Freddie Mac are in receivership, which account for? 95% of US home mortgages.? Each needs $100 billion in new capital. Good luck getting that out of a deadlocked congress

*The home mortgage deduction a big target in any tax revamp. The government would gain $250 billion in revenues in such a move

*The best case scenario for real estate is that we bump along a bottom for 5 years. The worst case is that we go down another 20% when a recession hits in 2013.

It could be that 95% of the new QE3 is already in the market, and that the markets will roll over once the initial headlines and ?feel good? factor wears off. ?With the markets discounting this action for nearly four months, this could be one of the greatest ?buy the rumor, sell the news? opportunities of all time.

Whatever the case, I am not inclined to chase risk assets up here. Anyway, I am now so far ahead of my performance benchmarks for the year that I can?t even see them on a clear day.

Is That My Benchmark Out There?

Watch Out for the Coming Risk Reversal

Newsletter

It is a fact of life that markets get overstretched. Think of pulling on a rubber band too hard, or loading too many paddlers at one end of a canoe. Whatever the metaphor, the outcome is always unpleasant and sometimes disastrous.

Take a look at the charts below and you can see how extended markets have become. Stocks (DIA), (QQQ), (IWM) have reached the top of decade and a half trading ranges. Bonds (TLT), (LQD) are at three month lows, and yields have seen the sharpest back up in over a year.

In the meantime, the non-confirmations of these trends are a dime a dozen. Every trader?s handbook says that you unload risk assets like crazy whenever you see the volatility index (VIX) trade in the low teens for this long. The Shanghai Index ($SSEC), representative of the part of the world that generates 75% of the world?s corporate profits, hit a new four year low last night. Copper (CU) doesn?t believe in this risk rally for a nanosecond. Nor is the Australian dollar (FXA) signaling that happy days are here again.

I am betting that when the whales come back from their vacations in Southampton, Portofino, or the South of France, they are going to have a heart attack when they see the current prices of risk assets. A big loud ?SELL? may be the consequence of a homecoming. A Jackson Hole confab of central bankers that delivers no substantial headlines next week could also deliver the trigger for a sell off.

You may have noticed that European Central Bank president, Mario Draghi, has come down with a case of verbal diarrhea this summer. His pro-bailout comments have been coming hot and heavy. When the continent?s leaders return from their extended six week vacations, it will be time to put up or shut up. The final nail in this coffin could be A Federal Reserve that develops lockjaw instead of announcing QE3 at their September 12-13 meeting of the Open Market Committee.

To me, it all adds up to a correction of at least 5%, or 70 points in the S&P 500, down to 1,350. I?m not looking for anything more dramatic than that in the run up to the presidential election. I am setting up my bear put spreads to reach their maximum point of profitability in the face of such a modest setback. A dream come true for the bears would be a retest of the May lows at 1,266, however unlikely that may be.

For the real crash, you?ll have to wait for 2013 when a recession almost certainly ensues. Stay tuned to this letter as to exactly when that will begin.

?The Real Crash Isn?t Coming Until 2013

Get Ready to Buy the Bond Market

Newsletter

The Treasury bond market has just suffered one of the most horrific selloffs in recent memory, taking the yield on ten year paper up from 1.38% to an eye popping 1.83% in weeks, a three month high.

Yields have just risen by an amazing 38%. This has dragged the principal Treasury bond ETF (TLT) down from $132 to $120. Those who were pining to get into this safe haven at a better entry point now have their chance.

Rumors for the plunge have been as numerous as bikinis on an Italian beach. Some have pointed to a suspected unwind of China?s massive $1 trillion in Treasury bond holdings. Others point to the incredibly thin summer market trading conditions. Add to that a relentlessly heavy new issue calendar by the government. After all, they have a $1.4 trillion budget deficit to finance this year. That works out to $4 billion a day.

Long term strategists point to more fundamental reasons. The spread between the ten year yield and the S&P 500 dividend yield is the narrowest in history. Even after the recent slump, equity yields still beat bonds by 20 basis points. This has never happened before. The smarter money began shifting money out of bonds into stocks months ago.

However, I think that an excellent trading opportunity is setting up here for the brave and the nimble. There is a method to my madness. Here are my reasons:

*US corporate earnings are slowing at a dramatic pace. Some 40% of those reporting in Q2 delivered revenues misses. They made up the bottom line by firing more people. This is the worst performance since early 2008. Remember how equity ownership worked out after that?

*The high price of oil is now starting to become a problem and will inflict its own deflationary effects. If we maintain the 24% price hike we have seen in recent months, that will start to present a serious drag on the economy.

*Fiscal Cliff? Has anyone heard about the fiscal cliff? This 4% drag on GDP growth, another name for a recession, is looming large.

*Don?t forget that the rest of the world economy is going to hell in a hand basket. The China slowdown continues unabated, and a hard landing is still on the table. Europe is in the toilet. Japan?s growth is on life support.

*The Chinese aren?t selling. They told me so. They are merely reallocating a larger portion of their monthly cash flow to Europe where yields are a multiple higher. They are doing this because I told them to. This helps support the Euro. Keeping the currency of its largest trading partner strong to preserve exports is in its best interest.

*QE3? Remember QE3? Even if the Federal Reserve doesn?t implement this expansionary monetary policy, Europe will. And the Fed will probably join in 2013 when we head into the next recession.

*Paul Ryan for VP? If elected, his death wish for the Federal Reserve will send asset prices everywhere plummeting, including stocks and bonds. Since Romney?s fumbled announcement, Treasury bond yields have soared by 25 basis points.

There are many ways to play this game. Just pick your poison. The obvious pick here is to buy the (TLT) just over the 200 day moving average at $119. You could buy an October $120-$125 (TLT) call spread in the options market for a quick bounce. If you really want to get clever, you can sell short the $110-$115 call spread, which has a breakeven in terms of the ten year Treasury yield of 2.10%.

The safe haven trade is not gone for good. It?s just enjoying a brief summer vacation.

Those Treasury Bond Yields Were Getting Mighty Thin

The Nationalization of the Bond Market

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I was as stunned as anyone when the yield on the ten year Treasury bond (TLT), (TBT) plummeted to 1.42% two weeks ago. Predictions that long dated government paper would reach subterranean Japanese levels, considered loony as recently as a few months ago, are now donning the mantle of respectability, and even plausibility. Where will this end? With yields at 1.25%, 1%? 0.50%?

As with any ground breaking, epoch making, even cataclysmic change in the fundamental structure in the global financial markets, I searched for the reasons why I didn?t see this coming. How could I be so wrong? What did I miss? I haven?t been this far off base since the term ?blue dress? entered the political lexicon.

Then I looked at the recent ownership of the Treasury bond market and the answer was so obvious that it practically lifted me up by the lapels of my Brioni jacket and shook me until the gold inlays fell out of my teeth. The implications for international finance are huge, and are even bigger for your own net worth.

It turns out that governments have been steadily taking over the global bond market, not just Uncle Sam, but all major countries that have been pursuing quantitative easing. As a result, private ownership of Treasury bonds has shrunk from 55% thirty years ago, to only 23% today. Foreign holders, primarily central banks, have increased their portfolios from 13% to 34% during the same period. The Federal Reserve?s ownership of the Treasury market has soared from 5% to 11% since 2012, thanks to QE1, QE2, and the twist policy.

Therein lays the problem. Governments aren?t like you and I. They are the ultimate ?dumb money?. Once they buy a bond, they don?t care what the price is. They just carry it on their books at face value. They don?t need to mark to market. When debt matures, they just roll it over into similar issues. If you or I tried this, we would go to jail, and possibly even share the same cell.

The bottom line on all of this is that governments are uneconomic, irrational, and even price insensitive buyers. If the price goes up they don?t care. They also don?t do what the rest of us do when prices spike, as they have done, and that is sell. That?s because they don?t have clients like we do. This has created an unnatural market where the demand for government paper is nearly limitless, and the supply is inadequate.

Using this analysis, the big surprise is not that ten year yields hit 1.42%, but that they took so long to get there. This also suggests that bond interest rates will stay unbelievably low far longer than anyone realizes, possibly for years more.

There is another angle to this, which the pols on Capitol Hill failed to recognize. As a result of the new Dodd-Frank financial regulation bill, many derivatives contracts will become marginable for the first time. With the aggregate amount of such contracts estimated at $700 trillion, even just a minimal 1% collateral requirement would automatically create $7 trillion in potential Treasury paper buying.

That is little less than half the current $15 trillion national debt. In fact, it was massive government mandated bond buying in Japan just like this that kept interest rates so low there for so long. I know because I have written three books on this topic.

Much of the current political debate revolves around the belief that the US government is borrowing too much money. But the markets are screaming at us that the complete opposite is true. It is not borrowing enough. There is in fact a global savings glut and bond shortage that looks to get worse before it gets better. As for the monstrous, untamable inflation that such high levels of borrowing created in the past, like the Loch Ness Monster, the Yeti, and Bigfoot, and I?ll believe it when I see it.

Look, There Goes Inflation

My Tactical View of the Market

Newsletter

The abject failure of the equity indexes to breach even the first line of upside resistance does not bode well for the ?RISK ON? trade at all. Only a week ago I predicted that the markets would be challenged to top 1,340 in the (SPX) and $78 for the Russell 2000 (IWM). In fact, we made it up only to 1,335 and $77.90 respectively.

To see the melt down resume ahead of the month end window dressing is particularly concerning. That?s the one day a month that investors really try to pretend that everything is alright. People just can?t wait to sell.

Blame Europe again, which saw Spanish bond yields reach a 6.6% yield on the ten year and the Italian bond market roll over like the ?Roma? (a WWII battleship sunk by the Germans while trying to surrender to the Allies). Facebook didn?t help, knocking another $8 billion off its market capitalization, further souring sentiment.

Urging traders to head for the exits was confirming weakness across the entire asset class universe. The Euro is in free fall. Copper took a dive. Oil is plumbing new 2012 lows. Treasury bond prices rocketed, taking ten year yields to new all-time lows at 1.65%. It all adds up to a big giant ?SELL!?

It is just a matter of days before we revisit the (SPX) 200 day moving average at 1,280. Thereafter, the big Fibonacci level at 1,250 kicks in. It is also exactly one half the move off of the October 2011 low, and unchanged on the year for 2012.
I am not looking for a major crash here a la 2011. There is just not enough leverage and hot long positions in the system to take us down to 1,060. It will be a case of thrice burned, four times warned. And remember, last year?s 1,060 is this year?s 1,100, thanks to the earnings growth we have seen since then. With 56% of all S&P 500 stocks now yielding more than the ten year Treasury bond, you don?t want to be as aggressive on the short side as in past years, when bond yields were 4 or higher.

By adding on a short in the (SPY) here, I am also hedging my ?RISK ON? exposure in the deep in-the-money call spreads in (AAPL), (HPQ), and (JPM), and my (FXY) puts. The delta on these out-of-the-money?s are so low that I can hedge the lot with one small 5% position in the at-the-money (SPY) puts.

If the (SPX) hits 1,280, the (SPY) puts will add 2.25% to our year to date performance. At 1,250 we pick up 4.00% and at 1,200 we earn 7.00%. I now have the option to come out at any of these points if the opportunity presents itself, depending on how the rapidly changing global macro situation unfolds. If we get another pop from here back up to the 1,340-1,360 range, I will double up the position and swing for the fences. There?s no way we are taking a run at new highs for the year from here.

Below, find today?s charts from my friends at www.StockCharts.com with appropriate support and resistance levels outlined. If I may make another observation, when you see the technicals work as well as they have done recently, it is only because the real long term end investors have fled. There are not enough cash flows in the market to overwhelm even the nearest pivot points. That leaves hedge fund, day, and high frequency traders to key off of the obvious turning points in the market. That also is not good for the rest of us.

It?s a good thing that I?m not greedy. If I had sold short a near money call spread for the (TLT) on May 23, I would be in a world of hurt right now. Instead, I went six point out of the money. So when we get dramatic moves like we saw today that take bond yields to all-time lows, I can just sit back and say, ?Isn?t that interesting.? This spread expired in six trading days, which should be enough time to digest the big move today and expire safely out of the money and worthless. What?s better, I can then renew the trade at better strikes after expiration into the July?s and take in more money.

If you are wondering why I am not doubling up on the short Treasury bond ETF (TBT) down here, it?s because it doesn?t have enough leverage. In these conditions you need to go for instruments that can generate immediate and large profits, such as through the options market. The topping process for the Treasury market could go on for another month or two. Until that ends, I am happy to use price spikes like today?s to sell short limited risk (TLT) call spreads 6-8 points out of the money, which can handle a 20 basis point drop in yields and still make you money.

If you own the (TBT) and are willing to take a multi month view, you should be doubling up here. This ETF will have its day in the sun, it is just not today. We could see the $20 handle again and maybe even $30 within the next year. That makes it a potential ten bagger off of today?s close.

I don?t want to touch gold (GLD) or silver here. The barbarous relic is clearly trying to base at $1,500 an ounce. If it fails, it will probably only go down to only $1,450 before major Asian central bank buying kicks in. Better to admire it from afar, or limit your activity to early Christmas shopping for your significant other. We are months away from the next major rally in the yellow metal.

The Roma

Time to Puke Out Again

Charts Are Breaking Down All Over

Newsletter

They say a picture is worth a 1,000 words, so here are 4,000 words worth. My friends at www.stockcharts.com put together this series of charts establishing beyond any reasonable doubt that the ?RISK ON? trade is breaking down across all asset classes.

Everything is breaking down, simultaneously and in unison, including the S&P 500 (SPX), Gold (GLD), Silver (SLV), Oil (USO), Copper (CU), the Euro (FXE), the Australian dollar (FXA), and the Canadian dollar (FXC). In the meantime, Treasury bonds (TLT), (TBT) are moving from strength to strength.

The news from Europe can only get worse. An American recession, considered impossible by strategists only a month ago, is now looming large as our own economic data continues to deteriorate. The flight safety has exploded into a stamped, driving the US dollar index up 12 consecutive days, a new record.

I have included a cartoon below from my old employer, The Economist, that neatly sums up the implications of the Socialist win in the French presidential elections. German chancellor, Angela Merkel, is meeting French president, Fran?ois Hollande, for dinner at Das Austerity Euro-Caf?. Austerity preaching Merkel is having a miniscule single sausage for dinner, while Hollande is enjoying a sumptuous repast and obviously ordering the most expensive wine from the list.

The cartoon would be funnier if it weren?t so true. Austerity is now suffering a retreat on the order of Napoleon?s retreat from Russia in the winter of 1815. Her Christian Democratic Union party suffered its worst post WWII defeat in last weekend?s North Rhine-Westphalia elections. It is now looking like Germany will have to accept a higher inflation rate as the price for bailing out Europe, something it is loath to do. Needless to say, this is terrible news for the Euro.

If these charts continue to break down, as the news flow dictates they should, here are my immediate downside targets.

(SPX)? 1,280
($INDU)? 12,200
(IWM) $70
(FXE)? $126
(FXA) $95
(GLD) $150
(SLV)? $25
(USO)? $32
(CU)? $22

Don?t Worry, She?s Picking Up the Bill

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