2008-10-12

Few bubbles left to burst

TBOND (30 YR - ZBZ8)

Sell from 119'20 till 121'00 Stop above 123 Target 113'13 - 103'02


Last few days have seen a lot of bubbles burst. Just to recall so far I have seen the deflation of these bubbles:

a) Emerging Markets will drive the world economy on their own (the de-coupling theory) bubble - well in my view emerging markets are nothing but a leveraged play on developed world (read USA) economy. Their economies are still tiny compared to developed world economy and the trade between emerging markets is mainly intended for final consumer in developed world. China would buy steel from India to build factories to produce electronic toys using chips made in Taiwan or South Korea assembling flat screen TVs using Japanese technology and Chinese and Taiwanese parts is all good only when a trader earning millions in bonus is buying a new home to keep that new TV or Santa being exceptionally happy with a child whose Dad brought home a big bacon like every other year. Remove the consumer and the trade between emerging markets falls through. So when the developed world grows 1% you can bet emerging markets will grow 5% 10% even 20% and you can use these leverage to get more bang for your buck. But same applies when developed world does not grow and the leverage works the other way.

b) Stock market bubble which took S&P to its all time high similar time last year. What took 4 years to gain took just a year to lose.

c) Commodities are in "super cycle" and will continue to grow as world is running out of them. No longer true. We are not running out of wheat corn and soya nor are we running out of copper steel and aluminium. Even that illusive last barrel of oil looking to sell for $200 seems an illusion as of now. All we are running out of is speculators and retail investors building large positions in commodities pushing them much above their "marginal cost of production". Remove mania and you have "sensible" prices for commodities.

d) Dollar is going to be replaced as world reserve currency. No in fact this year Dollar is the best performing currency. One by one Dollar has turned corner against all currencies. Even GOLD has failed to make new high against dollar (though it took my stop!). The only currency which has performed well (and likely to continue to do so) against Dollar is JPY. In a troubled world, people still rush to Dollar. For Dollar to go down again we need the economy to start improving again. See earlier post (When going gets tough .... the Dollar gets going)


But there are still some bubbles left to burst. For example people are still buying Damien Hirst's "contemporary" art for millions and Candy and Candy are still banking on "super rich" clients buying their expensive apartments luxuriously designed. I am expecting these bubbles to burst soon as well.

In addition, I do not understand why US Government Bonds still remain in such demand when there is tremendous supply - given all these mega Bailout business going on in the developed world. Treasury is printing bonds for any and every purpose these days. So why should I be satisfied with a return of barely 4% over 30 years. One aspect which is keeping it going is the "security" of US Government. But some time people will either run out of money to keep buying these bonds OR they will start finding better things to do with their money (like keeping it in bank once trust returns OR start buying stocks when bottom is in sight). That would cause the bonds to tumble.

I am therefore looking to go short bonds on next up move which I expect to test 119-121 area. Break below 113 will give me clearer signal to add to these shorts and target new lows on ZB.

I am also looking to buy NASDAQ100 (NQZ8) around 1262 area if that can reach on Monday. This will however be a very small and quick in and out trade.

1 comment:

  1. This trade is now working. The high of the last move up was 119'29. Expect bonds to tumble towards 111 - 107 level in near future.

    ReplyDelete

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-VS