SOMETHING BIG IS ABOUT TO HAPPEN?
10 November 2009 by TPC
33 Comments
David Rosenberg notes the incredible lop sided trading environment. The dollar short/long equities trade has become the no-brainer trade and is beginning to appear crowded. David notes:
Looking at the latest Commitment of Traders (COT) report, we can see some pretty interesting (and potentially disturbing) trends taking place (data for November 3rd):
- The only areas where the speculators (non-commercial accounts) are net short are in Treasuries and in the U.S. dollar. Everything else has massive net speculative longs and hence near-term vulnerable to a reversal.
- There is still a NET speculative short position in both the 10-year Treasury note of 85,551 contacts (on the Chicago Board of Trade). There are 95,648 net short contracts on the long bond too.
- But there are 29,608 net LONG positions on the 30-day Fed funds contract —down from the highs, but it means that Fed tightening is completely off the radar screen. At the same time, there are 152,311 net longs on the 2-year Treasury note, so it would seem as though we have a crowded trade among the speculators on a bear curve steepening trade.
- There is a significant net long position on the S&P 500 to the tune of 208,448 contracts on the Chicago Mercantile Exchange (CME).
- There is also a huge net speculative short position on the U.S. dollar (the ‘carry trade’). For example, on the CME, we have 24,389 net speculative long CAD positions; 50,264 net speculative long contracts on the Australian dollar, and 28,036 net longs on the Euro. These are huge numbers. What happens if/when the U.S. dollar ever undergoes a countertrend rally?
- The largest speculative long positions are in the commodity space (this is near-term bearish) … 271,564 gold contracts (a record) on the Commodity Exchange (COMEX); 44,312 net longs on silver (near-record but not quite), West Texas Intermediate oil contracts on the New York Mercantile Exchange (also a record); 10,871 net long copper contracts (a new cycle high); 5,538 net speculative long contracts on the Goldman Sachs Commodity Index.
Who knows how long the short dollars/long equities trade can go on, but I know when a trade is this crowded it’s generally best to step to the side and let the speculators have their fun. These sorts of lop-sided trading environments rarely end well.
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Gotta squeeze them long…….If the dollar slides any further, I sure wonder what the Chinese will do…just a threat will pop that thing up so quick
This can’t go on forever. Ben has created an environment that punishes the prudent and rewards the speculative. This is exactly what got us into this mess in the first place. When will we ever learn?
TPC Reply:
November 10th, 2009 at 8:24 AM
What’s the saying about a nation that treats its elderly poorly?
Divided States of America Reply:
November 10th, 2009 at 9:29 AM
I agree 100%. The people who are being prudent (and rightfully so) and not participating in this fake rally will be punished when hyperinflation does set in. That includes me. That is why everyone is trying to capitalize and get on this train while they can and build up a their wealth reserve in preparation of a dire future. The Fed is basically saying ‘Here is free money, get it while you can, and if you got the balls. You will need it in the upcoming apocalypse.’ Of course, this is widening the disparity between the elite and the rest of the population. There is no outcome to resolve this once the masses decide they have had enough of this transfer of wealth. Violence will be the only option at that point.
I can’t figure out what will cause the short squeeze. What level of crowdedness will cause someone to take the other end of this trade. The blessing of the Fed has proven enough to scare anyone off from trying to reverse this weak dollar/emerging market-commodity-high beta pump that has been going on since March.
TPC Reply:
November 10th, 2009 at 8:22 AM
That is my primary problem with the short squeeze thesis. The fundamentals don’t justify an extended dollar rally. Unless we get some serious jaw boning from foreign governments….It’s not hard to imagine a scenario where the Fed keeps rates at 0 for 2010, we pass stim pack 2 in Q1 or Q2, unemployment stays near 10%, equities rally another 20%, oil hits $100+, the dollar falls another 5-10% and it all unravels into the back half of next year when China & Japan finally say “enough with your debt”.
Interest rates spike, the dollar crumbles and then we have a real mess on our hands….
VCC Reply:
November 10th, 2009 at 9:17 AM
You’re right about fundamentals not justifying the short squeeze, but if there is another leg down in equities, investors will flock to the safest investment possible. There’s no chance the US defaults or prints their way to hyperinflation. Remember, the dollar is the worst currency out there, except for all the others.
Octopus Reply:
November 10th, 2009 at 8:41 AM
I agree. Also I have the feeling that the “political alarm level” on EurUsd rate is higher than current 1.50, may be nearer the all time highs.
SpiderTrader Reply:
November 10th, 2009 at 9:02 AM
What can they do besides run their mouths? They tried that a few weeks back and look where it got them. No where.
“What happens if/when the U.S. dollar ever undergoes a countertrend rally? ”
We’ll never know until we get a small test to see the market reaction. Sometimes these signals are not definitve (ie the markets shift significantly within a few months)(e.g. spring 2006 yen) but does indicate the amount of leverage in the system, other times, the signals are very clear (Jul08, financials and oil).
Interesting times. After having listened to your Richard Koo piece the other day I am convinced that we will simply keep dumping stimulus money into the economy. That is clearly their plan. That means rates stay low and stimulus 2 is right around the corner. This means the dollar is done for. Stocks rise (for now) and when the economy is still weak in the second half of next year there will be some kind of revolt against the reckless spending. The kicker is this:
Do we get a massive and potentially highly profitable bubble leading up to this? OR do we meander sideways before it all comes crashing down as the great Keynesian science experiment fails?
TPC Reply:
November 10th, 2009 at 8:45 AM
Great thoughts Spider. I think you’re dead on. The government and the Fed have made it very clear that the dollar is not their priority.
Is Julian Robertson right? Are we going to see an eventual revolt against the US dollar and our debts? We can’t afford to keep up these policies for another couple of years….
SpiderTrader Reply:
November 10th, 2009 at 8:53 AM
Raw materials are the play. I would not be a buyer here, but on any weakness.
Dollar tried to rally this morning, but got kicked right back down the stairs. It’s getting to the point where you have to wonder what kind of idiot would buy dollars?
jrsun Reply:
November 10th, 2009 at 10:05 AM
maybe just short-term play.
Marc Faber has been expecting a dollar rally from here
Everyone keeps talking about stimulus 2.0 but wouldn’t that have to be approved by congress and the senate? One would have to think that would be political suicide for the democrats going into mid term elections. Unless there is another major crash I just don’t see that happening. Why wouldn’t they just keep on with the QE which requires no vote and most people are even aware of?
SpiderTrader Reply:
November 10th, 2009 at 8:55 AM
The market will mysteriously fall 15% in the beginning of 2010. With unemployment at 10% the Congress will push thru another pork filled stimulus plan as they warn of impending economic collapse.
How crazy does that sound? Yeah, not at all.
JTodd Reply:
November 10th, 2009 at 9:19 AM
Kind of what I was thinking but it is going to take more than a 15% drop to scare the public. It will probably take a retest to scare everyone that badly.
SpiderTrader Reply:
November 10th, 2009 at 9:22 AM
We’re not going back to the lows in 2010. There is too much money sloshing around.
The economy is f$cked if they stop printing money. We all know this recovery is fake. They will engineer some sort of environment in which they can pass another stimulus plan.
Is there a website/company that allows a small investor to convert dollars into another currency for a reasonable price?
Naa Reply:
November 10th, 2009 at 9:39 AM
Josh,
Try EverBank for your needs (please do your own research – I have not used it)
http://www.everbank.com/001Currency.aspx
Girish Reply:
November 14th, 2009 at 5:36 AM
You can try Indian banks. They will do it for a small fee of 25$
We can’t afford to keep up these policies for another couple of years….
Says who? If you said two years ago we could have a trillion deficit and the market would rally, they’d have put you in a straight jacket. There’s no logic to the markets anymore. As long as the carry trade is using $ as the financing currency. Like you said, what would make the $ go up, except for a short squeeze, when every action the government makes (ignore what they say) says, “We don’t care about the $.”
insight4u Reply:
November 10th, 2009 at 7:19 PM
The $$$ will reverse when Israel takes care of IRAN becuz the world powers r 2 weak 2 do it themselves!
Either there will be another stimulus or maybe there will be some wars or maybe there will be a disease that will ravage the global economy and will forgive all past debts and a whole new world order. Sounds crazy…but you have to ask yourself, what are the alternatives. Is war or disease really as crazy as the U.S. government declaring bankruptcy or the U.S. in a hyper-inflationary environment?
TPC do you have any insights on how the Yen carry trade unraveled? Might be the script for how this rally ends.
“I know when a trade is this crowded it’s generally best to step to the side and let the speculators have their fun. ”
So did you sit out all of 1999 ? NASDAQ tech was a crowded trade, full of speculators.
Did your clients complain as you told them it would work out in the end? Which it did in March 2000 forward? But many people are impatient and chase returns?
Although the carry trade might be a bit stretched in the short term, it is not hard to see where it could go a lot higher in the long run.
The monetary base is not only in a vertical ascent, but also without precedence. We have never seen anything like this. The monetary base is essentially the Federal Reserve Bank’s currency and reserves. Now, with an expansion like this you would think inflation would be rearing its ugly head, but as hedge fund manager John Paulson points out “that’s because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, “almost 1-to-1 between the two.”
So what does this mean? I think it means that soon or a later the money supply will follow, and if money supply grows faster than the economy, that will create inflation. I don’t know how you feel but it looks to me to be practically impossible that the economy could outgrow that hideous spike in the monetary base.
Have no fear!…………
Senator Dodd, has a 1000 page Bill almost ready to REMOVE all the powers of the Fed,remove Helcopter Ben’s control,and likely Little Timmy, and the Congress is going to start setting policy!.
Now, doesn’t that make US all feel better?.
Since he did so well with FM/FM……….
Anyone know a reasonable OFFSHORE place to live?.
I think what we have seen thus far, is a party, once the Commercial loans meltdowns really get in gear. ( wonder where that several Trillions coming from?).
I’m looking at Andorra as a possible place to move myself and my money to. Check out their tax structure. Plus, there’s really good skiing there. The ObamaNation has me Fed up.
I use technical analysis to identify trends.
My long term USD indicator has been giving BULLISH warnings for some time and I am expecting a USD rally.
My indicators can identify trend changes before they occur.
They warned me of an impending market crash back in early *2007*
The VIX continues to give bullish warnings as well.
The primary trend for stocks remains down, is the current bear market rally ending ?
http://twitter.com/GrandSupercycle
When do the commercial shorts in gold cover? They are getting killed. The margin calls must be eating up some serious money. Everybody expects a big move down in gold and up in the dollar, but occasionally it works the other way.
Why is the dollar short position considered large? The CME is only one market and there are some holders of hundreds of billions of dollars who want something else. The RBI demonstrated that when they bought 200 metric tonnes of gold.
There is no fundamental reason to go long the dollar. The deficits just keep growing and now the trade deficit is growing again too. The fed is still buying mortgage debt in bulk quantities. There is considerable speculation about who actually bought the 80+ billion in notes this week. So I don’t understand all of the oohs and ahs about the “big” dollar short position. What is the actual dollar amount of the short position? Last week the Reuters IMM report showed it to be about 10 billion dollars in size. That’s chump change.
Good luck with OBama & Bernake a repeat of Bush,Cheney & GREENSPAN could see it coming in 2005 went to cash(small specs in the market mostly commodities) sold everything over the next 2years & worked overseas since that time expected this to crash in early 2007 living in South Africa at least for now.
Real estate especially coastal areas & farmland much much cheaper than the US ,infrastructure similar to the US I have been coming here for 5 yrs as I was a contractor for the military in Afghanistan & Iraq & looked at other countries including Australia & India(Aust. to expensive love India but gov. too contolling)
The money you bring in can easily be taken out also a kickoff point to look at other African countries I met many others from Nigeria , Kenya & Seirra Leone working for the military & also always meet other American Expats helped be in one large profitable real estate deal.
Biggest problem now is the rapidly depreciating dollar & the overvalued $rand is a major complaint here among farmers ,unions , exporters & myself
I believe the $US will turn but again I have been saying that for 4mos.
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