With a new year comes plenty of new forecasts – in fact, I’m sure you’ve seen your fair share. But I’d like to give you a little Resource Trader Alert insight into some of the inner workings of the financial world and how these predictions relate to your portfolio.

The jobs of providing economic forecasts/commentary versus trading advice are two completely different roles. One is to predict what the market will do and the other is to profit from how things develop.

At Resource Trader Alert, my premium commodities trading advisory, the focus is on executing high reward versus risk investment strategies to make money. A solid trading plan is developed for each option position with potential entry and exit points determined prior to getting into the market. This money management discipline is designed to eliminate or at least diminish the emotional components of the constant noise in the marketplace.

Opinions: Everyone Has ‘Em – But They Do Not Make Money

You cannot let what you think the market should do impact a well thought out trading plan. At RTA we trade technically what we see in the charts – and sometimes that goes against what we think should happen. The trading methodology of Identify, Execute, and Manage to Maximize outweighs the larger macro viewpoint for the future.

For example, back in mid 2009 we were one of the first to mention the Bond Bubble and profit handsomely from the decline in Treasury prices. The combination of 2008’s safety position unwinding and increased debt sales put the pressure on prices for our trade. The following sharp decline in Bonds from 121 to 112 in June gave us nice profits of $2,200 to add to the RTA track record.

For a trader there is little consolation in being right without the financial payoff.

What Does the Market Tell Us About Interest Rates?

Interest Rates are set to rise currently — there is very little doubt about that with the current Fed target between zero and .25. Short term rates are determined by government monetary policy and remain near historical lows — prices actually went negative because of panic buying in the 2008 collapse – which leaves rates nowhere to go but up. The question is not if rates will go back up, but rather over what time frame they will go back up.

All of this movement and the timing is important to commodity investors because without rising interest rates the dollar continues to fall – and a falling dollar is bullish for our overall commodity portfolio.

To estimate the timing of interest rate moves I always turn to Eurodollar (not to be confused with Euro Currency) futures. Short-term trading instrument prices move in the opposite direction of the interest rates for Eurodollars.

For example the current price of the March Eurodollar of .9973 reflects a rate of .27%. Subtract the price from par at 100 to get that current interest rate. So the market is telling us that rates should remain close to the Fed’s target range for the next few months.

Here’s a look at the last 15 years in the Eurodollar:

Looking past this chart and into the futures market, the deferred months of June (.9955) and September (.9923) for the Eurodollar show a moderate increase in rates has been priced in. These indicate a rate of .45% by June and .77% by September.

But the recent upward Eurodollar price action of nearly 25 points since last Friday’s Unemployment Report has decreased the likelihood of Fed Action any time soon.

Back to Bullish on the Long End of the Curve

Eurodollars, Bonds and notes are not driven by Fed targets but rather supply and demand. With the current fragile state of the economy and no sign of a job recovery it’s nearly impossible to raise rates anytime soon. Keeping mortgages appealing is also necessary for the distressed housing segment.

Ten-year note rates had recently jumped to multi month highs and now sit against the significant 4% yield barrier. This is a solid resistance that should not be violated without the green growth of economic recovery. Not just yet anyways, these are future concerns that will be later trading opportunities.

All of this combined makes our recent Bond trade look very attractive.

Plus, another added bonus is the hedge potential we have from another stock downturn or political/ economic crisis that would create flight to quality and boost bond prices. The outside markets of oil and metals are giving signals that the dollar is under pressure with renewed rallies. It is very difficult for the dollar to fall in an increasing interest rate environment and vice versa.

While the selling of Treasuries may very well be the “Trade of the Decade” all of our information adds up to a buy in the very short term, relatively speaking, with minimal financial risk. Look at this trade as a 100-yard dash for the next couple of months within the larger marathon run of rising interest rates.

It all comes back to commodities,
Alan Knuckman

January 18, 2010

Alan Knuckman

Alan Knuckman brings two decades of commodity trading experience to his role as managing editor of Resource Trader Alert, a weekly newsletter providing analysis and real-time updates on current and evolving market conditions. His options, futures, and currencies experience have made him a sought after commentator on issues shaping both hard (extracted or mined) and soft (grown or produced through the agriculture industry) commodities. He is a frequent guest on major international media outlets including CNBC, Sky News, MarketWatch, Bloomberg, Fox Business Network, CNN Money, and Reuters.

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