Precious metals

Gold/silver, platinum are now all about important swing resistance in USD terms.  Platinum in particular made a very large move up in the last 3 days.  Historically platinum tends to trade at a tidy premium to gold, but has been trading at a discount to gold for awhile now.  I bot some platinum futures this morning at around 1507 to join the extra silver I purchased above the break around 28.30 yesterday.  I think this obscene strength in platinum is telling me something.

If I don't get stopped out, I plan on holding these for very large gains for months or years to come.  It's about time the macro theme of global currency printing on the backs of low interest rates jumpstarted precious metals for another upleg.

Big macro trade on impending Australian housing bubble burst

The current Australian yield curve looks ominous:

The 3-month rate, which isn't displayed on the chart, is also up by 3.5%.  According to the liquidity preference theory, the yield curve should almost always uptrending, as shorter-term lenders implicitly retain the option to not re-lend later, while longer-term lenders do not.  Therefore, longer-term lenders are compensated more.  Borrowing short-term and lending long-term is how banks make money, and how they get into trouble when they suddenly can't borrow short-term to keep funding the long-term debt.  In this case, the expectations theory seems to be telling us that the market expects short-term rates to drop in the next couple of years.

Now why is that?  It appears that the Australian housing market, which is widely written about as being overinflated on various fundamental bases, appears to be still in the early stages of a bust similar to what the US has just experienced.  Australian government data shows the peak of the experimental all-dwelling price index occurred at the end of 2010, and has been downtrending since.  http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6416.0Feature%20Article1Jun%202012?opendocument&tabname=Summary&prodno=6416.0&issue=Jun%202012&num=&view=.  Since the government only has the incentive to show a continuing price uptrend, the fact that it isn't means that I trust the data is unmanipulated.

Interestingly, Australian banking and homebuilding equities have barely bounced since the US-led global financial crisis of '08, even though Australian housing prices still bounced strongly after '08, so it appears those markets have already anticipated a future housing bust.  So the better trade that remains is the yield curve trade.  The market is telling me in the yield curve that it expects the gov't to drop rates.  However, the strip of 3-month bill futures going out 3 years is not telling me the same thing.  This offers me a risk-free arbitrage, whereby I borrow Australian money for 3 years at 2.7% via a 3-year future (via YT futures traded on the Sydney exchange) and lend money for 3-months at a time at rates varying between 3.5% and 3.1% (via IR futures traded on the Sydney exchange), depending on the particular future expiring between Sept '12 and 3 years from then.  I pick up positive carry, all while retaining the option not to re-lend, which the liquidity preference theory would say is backwards.  This trade would be purely risk-free in terms of locking in a guaranteed profit as long as I hold to the 3-year maturity.  Any marked-to-market losses caused from the arbitrage blowing out further would be perfectly matched by increased positive carry going forward.  The problem is that my brokerage doesn't allow me to accept or supply physical delivery of bonds, so I'm forced to roll over any expiring futures.  So I can't ever deliver a 3-year bond at a locked-in 2.7% and receive a consecutive series of 90-day bills locked in at higher rates.  Instead, I have to count on this kink on the yield curve being unsustainable while rolling over the futures.  The nice thing is that this means my upside isn't limited to the 0.4-0.8% yield difference.  Instead, the yield curve can revert to a normal uptrend and give me the additional spread usually occurring between the 3-month and 3-year.

The 3-year rates are decided more strongly by the market, while the short-term 3-month rates are dictated by the Australian central bank.  Also, the Australian inflation index is running close to 1%, giving the RBA plenty of scope to lower rates without sparking overinflation.  Given this fact, along w/ the other indicators given above indicating the housing market is coming down, I'm guessing the RBA will have to stop fighting reality (http://globaleconomicanalysis.blogspot.com/2011/08/secretly-broke-in-australia.html and http://globaleconomicanalysis.blogspot.com/2012/06/laugh-of-day-no-risk-of-housing-bust.html) and short-end rates will have to come down soon.  Rather than make an outright bet on dropping short-end rates, I will make the spread trade against the 3-year bond in order to:

1) reduce day-to-day and intermediate-term volatility, thereby allowing me to increase leverage on the idea, and
2) hedge against the risk that the market on the 3-year rates is wrong in anticipating a housing bust and/or lower future short-term rates.

Basically, I'm betting that this curve kink is unsustainable.  Since, like I wrote earlier, the futures going out a couple years on the 3-mo bills don't even price in a rate drop, I will be placing my bet in that timeframe, and rolling over front-month 3-year futures until the curve appears normal.  Some things to look for to ensure the trade should work (besides being green on the trade) is to continue monitoring home price data for continued drops, and to look at the long-end of the curve to see if the 10-year yields start to tip downward even more relative to the front-end, which would be the market anticipating that current conditions are causing long-term disinflation--a kind of market forecast that the CPI won't be spiking anytime soon in spite of whichever monetary or fiscal concoctions Australia formulates.

Another trade to monitor is the spread between interbank rates (IB futures on the Sydney exchange) and RBA bill rates, which is currently very low.  This is similar to the TED spread, but unlike LIBOR, which has been under the microscope lately for being easily maniuplated, the interbank rates in Australia are based on actual market lending rates, rather than hypothetical rates volunteered by the banks.  The interbank (IB) rate futures are standardized at 30-day timeframes, so the durations on those don't line up directly with the 3-month RBA bills, but they're close enough in my opinion.  I will be getting long the spread down the road if home prices continue falling and bank stocks drop more, causing large losses in the banks and spreading fear among them to loan to each other.  To the extent the spread widens contemporaneously with the downslide, I will be riding the trend.  However, as a trader, I have no problem arriving late to the party to mop up when it's the most fun!  Most smart guys chronically arrive early, and that's why I make money much faster than them.

Trade into the debt ceiling deadline weekend

My trade going into the weekend will be short bonds (TLT), long silver (SLV).  Judging by today's price action, these are hedged, since after news of still no-deal going into today, both gold/silver and bonds ripped.  The price action appears to be treating gold/silver as "safe havens" in this case.  However, gold/silver typically tracks equities somewhat, and any raise on the debt ceiling will be even more dilutive to the USD.  So if the market thinks of this aspect to gold/silver instead, it could rip, which is contrary to public opinion of what would happen.  Likewise, the price action in bonds today is treating USTs as a "flight to safety."  However, if no deal is done, the market could treat this as an additional credit risk, and USTs could actually tank, especially if they officially get their ratings cut.

So this is the scenario as I see it:
1) No deal: then I lose on bonds (with the potential that the market will actually treat bonds differently on monday than it did today by focusing on credit risk rather than flight to safety factors), win on silver
2) Deal: I win on bonds, lose on silver (with the possibility that I don't actually lose on silver, but that it instead almost tracks equities, which should rip)

Debt ceiling; UST bond ratings

Moody's follows S&P in putting US bonds on watch negative.  However, they state that this is specifically related to any possible inability to raise the debt ceiling.

I have complete confidence that our gov't will figure out a last second solution for raising the ceiling.  That's simply how negotiations go... the vast majority of standoffs get done at the last second.  Also, there are so many possible workarounds to avoid default, it's not even funny.  So in that sense, I will be looking to make a bet on no-default as we increasingly approach a deadline.

However, in the longer-term sense, it's interesting to see the market finally start to see the big macro events unfolding... one day, US debt could easily be in the same situation as Greece is now.

It was very funny listening to Bernanke respond to Ron Paul's question about whether Bernanke considers gold to be money.  Bernanke's job is to keep foreigners buying USTs and USDs for as long as possible rather than gold/silver, so obviously he has to deny that gold is money while no doubt knowing the opposite to be true.  Bernanke's not an idiot... his position is political.

Gold/silver

Today Bernanke got the ball rolling on rumors of QE3, as he knows our economy still doesn't look that hot (driven by continued low housing prices and high home inventory overhang, which will likely keep prices low for awhile).  This may spark the next upleg in gold and silver.  GDX, a gold miner stock ETF, after diverging below gold, has now been catching back up.  This is what Soros had recently replaced his gold holdings with.

Fed announcement tomorrow

With the end of QE2 arriving and Bernanke due to talk tomorrow, I will be going into the meeting w/ positions somewhat at the inverse of several months ago, when the Fed announced what exactly it would be buying for QE2.  Instead of being short T-bonds, this time I will be long, as this is exactly the sort of "sell the news" play that tends to screw over every one trying to be logical.  The event tomorrow is the perfect opportunity for the big players who want to buy bonds to do so, as all the logical traders will be thinking that this is a sell w/ QE2 coming to a close.  I will also be long gold/silver in case any other methods of easing are discussed, and the bonds and gold/silver positions will be hedged w/ a short in the equity market.  This is a play on the meeting only--I have not and will continue not to take a position on bonds long term, as the macro drivers are competing; deflationary/deleveraging pressures are offset by worsening credit risk.  I remain bullish on gold/silver long-term, as the macro drivers for those haven't changed, and many of the weak hands have been driven out of silver in the recent downmove.

Refining margins

With what appears to be a bottleneck at Cushing, WTI crude continues diverging bearishly against Brent while the term structure for gasoline remains bullish.  Refiners must be making a fortune.  Going long refiners against a short XLE or ERX is probably not a bad idea

The best risk/reward market short remains eurodollars

With the TED spread at only ~24bps and short-term rate expectations sitting on lows, there isn't much lower LIBOR rates can go.  http://www.bloomberg.com/apps/quote?ticker=.TEDSP:IND#chart.  In the event of any kind of market panic, eurodollar futures will tank.  In the event the equities and/or other markets continue trickling higher, your losses on short eurodollars will be minimal.  Of course, this is only an intermediate-term hedge for equities, and cannot be relied upon for tight day-to-day correlation.

Still long VLO

Gasoline futures are in a nice backwardation, which is bullish, and WTI crude is at this point still in a slight contango, which is overall somewhat neutral.  Given this, there's no reason to fade the new highs in refining margins.  Not bullish on the overall market, but I'm still long VLO w/ market shorts to hedge.  It's at 28 as I write this.  I originally bought the breakout at 20, as you can go back in my blog to confirm.

TED spread interesting

If inflation is actually picking up at all, as may be finally be the case as indicated in my post http://uptrendingequity.blogspot.com/2011/01/important-trend-change-in-economy.html, then a yield-curve flattener trade may present a pretty good risk/reward setup at this point.  Rather than bet directly on short-term rates to increase, a bet on rising 3-month LIBOR rates against decreasing 10 or 30-year rates may be more appropriate, given the ludicrously low rates that banks are able to receive right now.  http://en.wikipedia.org/wiki/File:Ted-Spread.png.  Technically, if you duration-weight each side of the trade equally, you are indifferent to inflation.  A flattening yield curve should occur before a major bear market occurs, however.  I believe this trade presents a much better risk/reward than attempting to short equities in general, and the timing is more appropriate at this time, as the Fed thus far has denied any near-term possibility of raising rates for awhile now.  So the timing is ripe to catch people by surprise on the short-end.  By betting on increasing LIBOR instead of fed funds rates, as well, then you are hedging a net long equities portfolio even better against crisis scenarios.  To the extent rates on the long-end may rise more than the short-end rises, this would indicate runaway inflation beyond what the Fed is lifting rates to match, which I believe is possible only once housing comes out of its bottom, which can happen only once housing inventories dry up.  In that scenario, equities should rise even more than inflation.  So if you're long equities with a yield curve flattening trade to hedge downside, you should be in good shape.  Of course, I like to get in trades when the trade is trending my way, and this one isn't quite yet.  So I'd be light in the trade at this point.

Short GE futures (betting on short-end LIBOR rates to rise)
Long ZN (10-year) or ZB (30-year) futures (betting on rates on the long-end to drop).  Better yet, short TBT to pick up extra decay from the leveraged ETF.
Make sure you size appropriately to duration weight it.

Because gold/silver perform better when carry charges (interest rates) are low, increased interest rates may dampen their rise.  Therefore, this yield curve flattener may be a good hedge for a long gold/silver trendfollowing long hold.