Monday, August 16, 2010

Start U.S. T-Bond Shorts

Since our last market update, where we pointed out that the U.S. has already defaulted on its sovereign debt obligations, such as 30-year T-Bonds, markets have traded in a range, generally moving side-ways. Nonetheless, Independent has managed to get readers into these positions with timing such that not a single "under-water" day has occurred on a NY closing basis, which is an unusual feat, to say the least.

Today's headline is that the time has arrived to start building a short position in U.S. T-Bonds. Thus, as of tomorrow morning, when the reader may act on this new position, there are four positions to consider -- gold, SDS (short S&P500 stocks), FAZ (short big bank stocks) and TBT (short U.S. T-Bonds).

Our universal currency position in cash -- in the only trustworthy form of gold or silver -- now stands as follows.
March 28, Spot Gold per oz: 1105.50
Aug 16, Spot Gold per oz: $1224.40
10.7 percent gain
This is not a huge gain, but most other markets have been declining in the same time period. The March 28 start date above is the first post in this blog and as such is a purely arbitrary date regarding the precious metals markets. For example, most of the physical gold I have purchased was in the $700 - $800 per oz range prior to March 28, 2010.

At any rate, the current gold price is near the all-time high which could be breached on the upside in fairly short order given news developments since my last market update on June 7. First, awareness grows of the sovereign debt crisis in many nations including Europe, Japan and the U.S. Second, monetization of this debt has been ongoing and officially, a new phase of quantitative easing has been announced. These terms -- monetization and quantitative easing -- just mean the criminal banking cartel including the privately-owned U.S. Federal Reserve print money "out of thin air" to buy U.S. debt issues, among other things. The net result is dilution of the value of any currency one holds.

The race is to get rid of any paper money or deposits of any kind, beyond cash flow needs (e.g., bills to pay) for the next few months. All the rest should be in gold or silver in one's physical possession to protect against this planned degradation of your paper wealth.

As explained in the previous reports cited, if one holds paper assets, including gold which is not physically delivered, one has not done nothing. In fact, one has supported the immoral activities of the banking elite by providing them with your paper money to use against you in dozens of ways, including suppressing the price of your gold/silver investment. And one gets in return only the promises of people who have no regard for your interests.

On the other hand, by taking physical delivery, one adds to the current run on the gold banks, generally making physical gold or silver available for delivery more scarce.

The bet against big banks by using the FAZ ETF is also doing well, but basically moving side-ways since our last report.
May 3-4, FAZ: $12.00
Aug 16, FAZ: 15.45
28 percent gain
I promised to explain how I decided to pull the trigger on the FAZ position back in May, 2010. As stated in the link above, betting against the big banks can be very risky, primarily because everybody knows the controlled governments will always bail the banks out of their ill-advised lending to parties, such as countries, that cannot repay. Previous debt crises in recent decades -- Russia, Far East, South America, Mexico, etc -- have always worked this way.

So what could change this invincible picture of the big banks? Answer: now the governments are broke. Simple as that. If daddy (governments) is broke, nobody is there to bail out junior (the big banks). Therefore, junior must face the consequences of ill-advised actions (lending). Why are the governments broke? Too much borrowing and their citizens are broke, too, so there is nobody to tax anymore. That simple. Thus, the core short position using FAZ.

Second, price charts strongly suggested big bank stocks had peaked and FAZ had formed a bottom over many months.

I call this the "cobra maneuver". You watch and wait, and when the target blinks, you strike.

The Independent position now stands here:
May 10-13, SDS, 30.84
Aug 16, SDS, 33.63
9 percent gain
Again, this position remains in-the-money, with many weeks and up and down swings in a range resulting in side-ways price action.

Why so much side-ways action? For one thing, it provides traders with more opportunities to make money. Say the S&P500 oscillates from around 1000 to 1100 three times. That amounts to 600 points of S&P500 price change to be earned -- 200 per cycle with 100 going up and another 100 going back down. In short, the side-ways up-and-down cycles can provide as much profit opportunity as a one-time "sky-jump" drop (a la Jim Sinclair) of 600 points from the present approximate 1080 to 480 which would be almost 200 points below the previous panic low.

Since this blog is not a financial news-letter nor aspires to be, I hope to help readers make some significant money, without detailing more specific tactics. For example, when FAZ was above 18 recently, I sold some lots (a lot is 100 shares) keeping a trimmed down core position and then bought them back to reestablish the full core position when FAZ was recently around 13. Well, that is $500 (5 points x 100 shares) per lot traded.

This sort of activity cannot be micro-managed here, beyond noting, as previously, that if you take profits on your core position, you will probably reap less profit in the longer trend which is just starting now, than otherwise. By taking partial profits on a core position, one risks the benefit of further gains.

One way to reduce that risk is the buy additional lots on price dips so you momentarily have more than your desired core position. Thus, at price peaks, you sell some lots without reducing the size of your core position.

The TLT ETF is a proxy for U.S. 30-Year Treasury Bonds (T-Bonds). The 2x inverse TBT EFT goes up when T-Bond prices go down. Previously, I was looking to start a short T-Bond position by buying TBT lots (or shorting T-Bond futures) when TLT rose above 100. Then, I saw that stocks had not declined very much yet, but TLT was touching 100, so I withdrew that suggestion, because the market revealed that 100 was too low a TLT price to be safely shorted.

Today, however, TBT is now in play. Although stock indexes were flat today, TLT jumped by 2.56 points, which is a very unusual move, perhaps prompted by the Fed's quantitative easing plans, although even that is old news. At the close we have TBT at 32.45. My suggestion is to start shorting T-Bonds in the morning with an order like this:

Buy 100 TBT Limit Price 32.50 AON

100 shares is one lot. AON means "all-or-none" which prevents the brokers from filling your order with multiple trades (e.g., 80 and then 20 = 100) and hence multiple commissions. Limit Price means you cannot get a worse (higher) price than 32.50. [Disclosure: Just before the 4 PM EST close today, I bought a partial core TBT position as suggested at 32.49.]

What can happen tomorrow morning?

Alternative one: You will not get this price because TBT opens higher, reversing today's extreme action. However, during the day, it is common for price range to vary to include prices at or near the previous close. Not to worry if one gets no fill on the above order tomorrow. With further larger drops in stocks, TLT will spike higher and TBT lower as a buying opportunity.

Alternative two: Today's big up-move in TLT (and down-move in TBT) was large and formed what is called a chart break-out, in this case, to the up-side for TLT. This allows us to get better (lower) prices to enter a TBT position. What is the implication? Lots of traders buy up-side breakouts like this expecting further upside TLT price action.

And it gets worse. There is lots of talk in the contrarian financial media (such as in the Further Reading links here) about shorting T-Bonds and that there is a huge T-Bond bubble which is about to burst. This suggests that many have already shorted T-Bonds and are now under-water (holding positions showing unrealized paper losses). They are vulnerable, perhaps even sleepless tonight. Those who are not strong hands (that is, who are over-leveraged) will get margin calls and will have to pony up more cash or "cancel" their short positions ... by buying to offset them. This buying could produce a further price jump upwards tomorrow, at least at the open. This is called a short-covering rally where the TLT price rise partly represents attempts by previous shorts to limit their losses rather than "real" buying for fundamental economic reasons. Combine both, as the economy appears to be weakening, and a TLT price spike is more likely.

In sum, alternative two means the above order, placed before market open, may get a TBT price much lower than the limit of 32.50 stated, which of course is good for starting a TBT (or short T-Bond futures) position. While people who were too hasty in shorting T-Bonds have been suffering for weeks and especially today, readers here will be at a relative advantage.

How high could TLT go? 107 and about 118 are general target areas to keep in mind. Thus, please pay attention to the words "start shorting". Tomorrow, for better or worse, we just tip-toe in with about 1/3 or 1/4 of our desired core position. In other words, the distinct possibility of this initial position going under-water for a period of time is appreciated. However, if the above TLT targets are met, we sequentially add one or more lots to the TBT position at even lower TBT prices, thereby price-averaging to our advantage.

What is a desired core position? It all depends on amount of funds deployed. If, say, $10,000 USD is for the TBT position, then 100 shares (one lot) above is about 1/3 of that. If $100,000, then 10 lots would be 1/3 of the core position, and so forth.

Keep in mind, that stock indexes have not yet dropped dramatically, in agreement with my previous comment that a death by 1,000 cuts was the most likely scenario. At present, it is an insult to our intelligence that the DJIA is above 10,000 and the S&P500 is above 1,000, but remember, as stated previously, this is a fight to the death. November elections are upon us in the U.S. The elitists and their controlled government stooges will stop at nothing to maintain the illusion of the imaginary economic recovery they have invented and talk about daily using manipulated government bureau statistics.

This sort of consideration helps explain the prolonged side-ways price movement in trading ranges. It is a test of patience. Add the cobra maneuver and it is easier to be patient.

In previous articles, I described the Texas Hold 'Em poker analogy, where we know the opponents to our short positions are bluffing. That is, the governments are broke; they have no winning cards; they have no chance of winning. So our positions benefit much more than a momentary blink for a cobra strike, since their opponents are dead-men walking, and everybody knows it. While they will stop at nothing, all their remedies to maintain their power (in government and banking) just make the crisis worse, again to the further benefit of our suggested positions.

Since we know they hold no winning cards, it is like playing poker with a child where one can see the cards in the child's hand. And see exactly when the child has a loosing hand. Well, the governments, central banks and other big private banks have no winning cards. Their only remedy is to dilute and thereby devalue paper currency.

Therefore, our cobra positions are about as close to guaranteed victories as it gets, as long as they are not over-leveraged, so adverse price movements can be sustained without booking losses from forced selling, either from fear or lack of margin funds.

At any rate, once we see a series of 3 to 5 percent daily stock index drops, T-Bonds will spike higher. For this reason, we are only starting a minimal short position, ready to add to it only when prices are much lower for TBT, say, below 30 (but watch TLT targets to appraise where TBT is at those times).

The above may read as somewhat insane to sane readers. The suggestion is to short an asset (T-Bonds) that is rallying. Yes, that is what the suggestion is. It's called a "head fake" engineered by entities typically helped with (illegal) insider tips. The big players want to flush out premature shorts by such a rally (called a short-covering rally or short squeeze), at which time the big guys reap profits from long positions in unashamed market manipulation to squeeze (force major pain for) premature shorts. Then the big guys reverse position and go short.

In brief, the Independent tactic is to follow the big players. Which means that one should never develop positions which exceed funds to back them -- never use too much margin, too much leverage.

Example: Back in late 2008 when TLT spiked to 123, I had a small TBT position which went way under-water (price far below purchase price). Since as a little guy, I was positioned like the big guys, that is, I was not over-leveraged, I could just sit on that small position until it was finally sold at a profit several months later when price reversed in my favor. All the over-ambitious (greedy) folks had to sell at losses -- do not be one of those.

As a coming preview, we are going to talk about food, and DBA is a food ETF following futures prices for grains and other soft commodities, such as sugar, etc. In short, we have an international food crisis dawning as we speak, so on pull-backs we will be suggesting starting a DBA position (long food commodities).

Future Market Posts
Readers might already recognize that I post on market matters on a as-needed basis. If prices on our positions are going side-ways, there is not much to do or say. However, as in today's post, when some action on our suggested positions arises, boom, a market post is due here. However, if you have a question, add a comment or send an email.

For example, positions in gold/silver miners are pending a good entry point. My bias is companies with only or mostly U.S. or Canadian operations, hopefully to reduce political risk. It is true that many profitable miners are located elsewhere and many experts recommend them, but my bias is to reduce political risk (as in nationalization, etc) in my selections. I like small explorers with proven gold/silver assets in the ground and thus likely to get financing for the mining stage, and junior producers with cash flow from initial mining production already realized or about to come on line. Either way, one is buying gold and silver at a deep discount.

Some stock symbols that mostly fit in this group include SVM.T, AXU, THM, AZK, TLR, KMKCF, RIC, MGN, SNSFF, CDE, TRGD, MDW and others. Your ideas are welcome.
© 2010 James J Keene


  1. This morning (Tuesday), for our TBT (short T-Bonds) position, we got a variation of Alernative one above. The open was 32.47, a better price than our Limit Order, and as it turned out, we bought the low of the day. And with the 32.82 close, we go to bed with a slight gain. This will be designated as a 1/4 core position, assuming allocated funds are divided into 4 parts (3 parts was used as an example in the post above). Now, listen up.

    1. As a TBT position is built up, one has an intermarket spread or arbitrage position because, generally, as stocks go up, T-Bonds will go down in price. Translated, SDS will generally move opposite to TBT. For futures traders, being short the S&P500 will most often move opposite to a short T-Bonds futures position. This means that volatility of account equity will generally decrease, since a gain on one leg of the spread will be accompanied by loses on the other leg.

    2. Naturally, we look to be prepared for a time when both legs profit simultaneously.

    3. We know what to do if TBT goes lower -- add to our posittion. Generally, look for 4 or 5 points lower -- i.e., TBT in 27 - 28 range.

    4. Note that 100 basis TLT was a upside resistance, but now, to some degree, is a price support. So if T-Bonds (and TLT) drop in price (e.g., stocks rally), and TLT 100 is penetrated, have a standing GTC (good to cancel) order to take some or all profit on the TBT position, with the view we might well bounce from that TLT support with another opportunity to short T-Bonds (by buying TBT again). Well, that is the sort of thing I've been doing for many months now, always with the bias to have some lots of TBT in inventory, and if not, looking for good times to put some inventory of TBT on my shelf.

  2. I will take a look at all the blogs, thanks for sharing this list.