Monday, July 21, 2003
Issue Contents:
| 10:43 | Welcome! |
| 10:53 | Morning Action So Far... |
| 12:40 | Best of...Bonds. |
| 14:38 | Afternoon Direction |
| 15:34 | First Look at Tuesday |
| 15:45 | A Bounce Before The End |
| 16:24 | Ciao for Now... |
Good morning! Welcome to the first day of our new format. As this week goes on, you'll see us getting things up to speed...
...S&P futures and NASDAQ futures moving straight down to test last week's low. I guess I missed an excellent week of trading the Treasury Notes and Bonds while on vacation.
Once in a while, when things get truly overdone in a particular market, we end up writing a public service announcement sort of article.
Given the big bond crash over the past week, here is our May 19, 2003 column, revisited.
(05:00 AM) Teresa_Lo: Good morning.
(05:00 AM) Teresa_Lo: The front page headline on the Wall Street Journal is an interesting one.
(05:01 AM) Teresa_Lo: "The White House has abandoned verbal support for a strong dollar, the Treasury secretary indicated. John Snow said the government no longer measures the currency's strength by its market value, focusing instead on such traits as public confidence."
(05:01 AM) Teresa_Lo: Well, at least the "Snow Job" is over.
(05:01 AM) Teresa_Lo: I've been pondering this whole thing this weekend.
(05:01 AM) Teresa_Lo: Let's take a look at the big picture.
(05:01 AM) Teresa_Lo: We have:
(05:01 AM) Teresa_Lo: Stocks UP.
(05:01 AM) Teresa_Lo: Bonds UP.
(05:02 AM) Teresa_Lo: Gold UP.
(05:02 AM) Teresa_Lo: Dollar DOWN.
(05:02 AM) Teresa_Lo: Real Estate UP. As Miss Clavel from the classic Madeline story would say, "Something is not right!"
(05:03 AM) Teresa_Lo: The second headline in the Wall Street Journal is:
(05:03 AM) Teresa_Lo: "The Labor Department said the April inflation rate hit a 37-year low, less than two weeks after the Fed warned of deflation. The IMF warned that Germany, Taiwan and Hong Kong face the risk of deflation and that deflation in Japan could worsen."
(05:04 AM) Teresa_Lo: The third headline is "Japan will bail out Resona, with about $17 billion of public funds, raising concerns that other big banks will seek help."
(05:04 AM) Teresa_Lo: OK, OK.
(05:04 AM) Teresa_Lo: I get it.
(05:04 AM) Teresa_Lo: Everyone is freaking out about DEflation.
(05:04 AM) Teresa_Lo: But...
(05:05 AM) Teresa_Lo: it makes the big picture of Stocks/Gold/Real Estate/Bonds UP and Dollar DOWN even more bizarre.
(05:06 AM) Teresa_Lo: Last night, I had a Eureka moment.
(05:06 AM) Teresa_Lo: I was thinking...why didn't we get caught up and buy Net stocks at the top?
(05:07 AM) Teresa_Lo: Why don't I own any bonds right now?
(05:07 AM) Teresa_Lo: Why don't I own any real estate right now?
(05:07 AM) Teresa_Lo: Why don't I owe any money right now?
(05:08 AM) Teresa_Lo: Why aren't I doing what everyone else is doing?
(05:09 AM) Teresa_Lo: I took the microscope to this a little more...
(05:09 AM) Teresa_Lo: Why have I held Treasury Bills in my account for YEARS?
(05:09 AM) Teresa_Lo: Why don't I like to hold trades overnight?
(05:09 AM) Teresa_Lo: Why am I happy?
(05:09 AM) Teresa_Lo: When I obviously missed the big party?
(05:10 AM) Teresa_Lo: And you know what the answer was?
(05:10 AM) Teresa_Lo: BECAUSE I HATE HANGOVERS.
(05:10 AM) Teresa_Lo: I'm happy with cash.
(05:10 AM) Teresa_Lo: I am not greedy.
(05:10 AM) Teresa_Lo: I know that the market is not here to make me rich.
(05:10 AM) Teresa_Lo: That I have no inherent right to profits.
(05:11 AM) Teresa_Lo: Instead, I recognize that savings is the result of delaying consumption. It's the difference between how much comes in and how much goes out each month.
(05:11 AM) Teresa_Lo: And the difference is saved until there is a good amount of it.
(05:11 AM) Teresa_Lo: At which point, I began to trade with it.
(05:12 AM) Teresa_Lo: Since this capital is precious, since it has taken my lifetime to accumulate, I don't look to win the lottery.
(05:12 AM) Teresa_Lo: That's why when I knew that stocks were going parabolic in 1999 I didn't go long and strong.
(05:12 AM) Teresa_Lo: That's why I never put on the big Mother of All Shorts in 2000.
(05:13 AM) Teresa_Lo: That's why I don't own bonds now.
(05:13 AM) Teresa_Lo: Simply because there is no need to chase.
(05:13 AM) Teresa_Lo: Because the market is diabolical.
(05:15 AM) Teresa_Lo: Obviously we're in the middle of a big blowoff in bonds.
(05:15 AM) Teresa_Lo: Obviously there is money to be made.
(05:15 AM) Teresa_Lo: But not so obvious is the risk.
(05:16 AM) Teresa_Lo: As any market goes parabolic, the price bars increase, and so for the same exposure, the absolute risk to capital is larger.
(05:17 AM) Teresa_Lo: Because when the feeding frenzy ends, the house of cards collapse.
(05:18 AM) Teresa_Lo: Justin Mamis really said it best in his book, The Nature of Risk.
(05:18 AM) Teresa_Lo: Any given position is a function of price and information risk.
(05:18 AM) Teresa_Lo: When price is low, there is usually no information.
(05:19 AM) Teresa_Lo: When price is high, you've paid to know all there is, but everyone else knows it too.
(05:19 AM) Teresa_Lo: In either case, you have to know when to get off.
(05:21 AM) Teresa_Lo: Right now, I am sure that in the case of bonds, it's mostly price risk, since everyone on the planet must know about deflation already.
(05:21 AM) Teresa_Lo: Take a look at this little tidbit.
(05:22 AM) Teresa_Lo: On the weekend, I emailed myself a story from FT.com. Afterwards, they tell you what the top three emailed articles are, and they have not changed all weekend: DEFLATION!
(05:25 AM) Teresa_Lo: I just can't get the comment from PIMCO's Bill Gross out of my mind: "With government yields at near record lows, we remain convinced that Treasury bond's salad days are over - no more capital gains - but that a bear market may be years away."
(05:25 AM) Teresa_Lo: Isn't that basically a declaration of some kind of "permanent plateau"?
(05:26 AM) Teresa_Lo: I know there will be arguments about this, but to me, it's more of an intellectual exercise, for it is not my business to take untoward risk with my personal savings.
(05:27 AM) Teresa_Lo: While the others chase, I will be happy with some T Bills, some gold bought back in 1999 (remember, we were going to need that for Y2K), and some Swiss Francs. Thanks.
(05:28 AM) Teresa_Lo: I'm not going to get the last eighth, or maybe even the last 8 points in bonds, but hey, I wasn't there at 4,816 in the NASDAQ 100 Index either.
(05:33 AM) Teresa_Lo: P.S. You read it right if you sense that the bonds and Dollar are in the panic phase!
(05:34 AM) Teresa_Lo: Let's just hope that when it's all over, the next headline won't be another Long Term Capital Management.
As we get set for the last hour of trading, we have bonds continuing their crash, while the S&P formed a classic bear flag after testing last week's low.
The thing to watch for this afternoon would be a breakdown under last week's low, as many traders will become aggressive sellers if it is broken decisively.
Tomorrow's U.S. economic calendar is light, with only two numbers coming in the morning:
- 7:45 a.m. BTM-UBS Retail Sales Index for July 19 week.
Previous: +0.9%. - 8:55 a.m. Redbook Retail Sales Index for July 19 week.
Previous: +1.1%.
The excitement will probably be in earnings expected after the close tomorrow. Conference calls include notables such as Abgenix, Alaska Airlines, Amazon.com, Boston Scentific, Cendant, DoubleClick, EarthLink, MGM, RadioShack, SOHU.com, Soundview Technology Group, Vitesse Seminconductor and WestJet. That's some cross-section of the economy.
S&P futures tests the lunchtime lows and bounces back up into last week's low.
We'll see how much resistance there is right here in this SP 977 area.
Have a good afternoon. We'll be posting more overnight.