Unemployment Claims Improve..

but not by much.

April 30 (Bloomberg) -- Fewer Americans filed first-time applications for unemployment insurance last week, indicating the pace of job losses is slowing even as the total number of people on benefits continues to break records.

Initial jobless claims decreased by 14,000 to a less-than- forecast 631,000 in the week that ended April 25, from a revised 645,000 the prior week, Labor Department figures showed today in Washington. The number of people staying on jobless benefit rolls increased by 133,000 to 6.27 million, the 13th straight week the figure has set a record.

Interest rates have been thriving on dismal economic news and are now resting on the upper boundary of a possible trading channel. Despite continued strength in rate movement, Volatility strength as measured on the daily basis, is starting to weaken. A much stronger move is needed today to keep this rally going on a short term basis. End of month portfolio shifting could also be contributing to the recent move.

With the power of the Fed lurking in the background, rates may reverse course temporarily. While the Fed is big, the Global bond market is even bigger. It will be interesting to see what the Fed does in implementing their long-term treasury buyback plan. While their timing is important, the size of their purchase will show how serious they are about driving rates down below 3%.

Fed, Consumer Spending Boost Rates

Despite a -6.1 Gross Domestic Product showing for Q1 2009, markets chose to focus on a 2.2% increase in consumer spending. When the Fed chimed in saying that the end is in sight, 10 year note rates broke through the 3% level and 30 year rates broke 4%.



The daily rate chart above shows the evolution of this move. Since the last Fed meeting when rates dropped to 2.5%, rates traded in a tightening pennant formation until last week. Two times after breaking out of the pennant, rates came back to test the upper pennant levels but held firm. It was no surprise that rates finally picked up some momentum on the upside.

Despite the apparent strength, today's move caused rates to jump to an overbought level. Notice also that rates are near the upper boundary of a possible channel. That's not to say that rates can't go higher. I would expect rates to respect this channel for the moment and perhaps fall back to the moving average before breaking higher.




The weekly chart shows a similar picture. Rates have reached the upper boundaries of a declining channel. Again, this resistance level must be respected. Earlier work discussed in previous blogs indicated that rates could possibly go to 3.2 and to 3.6% by June.




Weekly volatility is starting to rise and can increase a lot just to reach the average level. Rising Volatility requires one to stay with the trend, which is up. Short term trading opportunities might exist over the next few days and a retracement to a trendline could occur before some news provides an impetus for rates to break through strong resistance levels.

Rates Rise as Fed Meets

Ten year note rates surged to close above the 3% level yesterday spurred on by improving consumer confidence and housing data. Rates may continue to rise following today's report on 1st quarter Gross Domestic Product (GDP). Analysts predict that the economy might have shrunk 4.7% last quarter. An improvement over the previous quarter's -6% decline.

Markets have been reacting positively to recent economic data releases even though the numbers are still very negative. For example, yesterday's Case-Shiller report on real estate prices showed a year over year drop of 18.6% based on February figures. Business news analysts claimed that investors were encouraged that the rate of decline may be slowing. January's figure showed a 19% year over year decline based on a ten-city index.

The government's debt auctions continue to go well. Despite the massive amounts of debt the US is incurring, Treasury Bill, Note and Bond auctions continue to be over-subscribed. The dollar has remained strong in world currency markets.

With all of the cross currents in the news, trying to make decisions on future rate moves based on fundamentals proves to be difficult. On one hand, the economy still appears to be very weak. The potential damage that the Mexican flu can cause to the world economy weighs in favor of lower rates. However, the ever increasing US government debt levels should add to higher rates.

Technical analysis however indicates that pressures are building to push rates higher. Rates have been continually falling for years though. The recent monthly test of the lows may prove to indicate that this exceptionally long termed move may have finally come to an end.

Don't ever lose sight of the market truism, "Markets can remain irrational much longer than investors can remain solvent."

Mexican Flu Rattles Markets

With just a couple of days left in the month, my attentions are turning to my monthly analysis. Last month, I detailed several scenarios that I thought the Dow could take. I always feel most comfortable when I see a three period test of the low. April data is playing right into this scenario. Granted, there are three trading days left in the month and anything can happen but seeing how the pattern is developing, it is my best guess that the stock markets will fall next month, testing the lows or at the very least, the red support line.

There appears to be a heavy supply of news that could be interpretted negatively causing the market to again collapse. The bank stress test results so far have been pretty lame. Who among us doesn't believe that the banking system is still in trouble? More and more people continue to lose jobs, consumers are tightening their belts, spending only on necessities. And the biggest potential problem is the Mexican Flu situation. I can't think of anything that has to potential to rock our world sufficiently enough to drive the markets below the February lows than this.






NOTE RATES A MYSTERY



The chart of the monthly 10 Year Interest rate shows a successful three month test of the low. As expected, rates are up this month but despite this bullish pattern, trying to get a handle on the news that may affect this market is confusing. There is still the red colored trend line that must be respected. This comes in at the 3.20% level. Yesterday my daily chart work targeted a much higher level and truly, this chart leads me to want to bet that rates can easily reach the 4% level again, if we can just clear the 3.2% hurdle.


Rates have fallen this week as the Mexican Flu worries have stimulated a "flight to safety." But how safe are Treasuries? How safe is the dollar? The Treasury and Federal Reserve have been taking huge bets that their stimulative efforts will revive the economy. For their gamble to pay off, the economy needs to rebound with significant growth. What happens though if we are hit with another panic situation? What happens then? I can see it now, government officials, bank CEOs, major manufacturing companies on tv; will be explaining that it is the Perfect Storm. We could have never seen this coming! Of course not. It's called RISK!

10-YEAR NOTE RATE TARGET: 3.6% on June 5

Picking a major market move is no easy feat and those who can notably do it wind up earning millions of dollars on Wall Street. By using some basic chart reads though, we can make logical guesses on where markets might go.

We have seen a nice recovery off of the panic low rate levels. In mid-November, 10 year rates tried to break below the 2.0% level but since have been fighting their way back.



As we have discussed in previous posts, when market prices break through a key support level, the market will usually try to get back to that key level. Rates recently have been pressing up against the 3.0% level and on several occasions, broke through only to fall back. Notice however that pullbacks from 3% are weakening. Rates really want to advance or so it appears.

I like to look at a number of derivative views of price to help make my decisions. An important one is the rate of change of the moving average. One can easily deduce that when the average change in the moving average is positive, price is going to continue to advance. Many chartist might look at the above chart and recognize a saucer pattern developing. This is generally a bullish indicator.

I'm not sure how much longer rates can be contained. The Federal Reserve meets this week. The Fed has been known to rattle the markets with their announcements. The last time the Fed met, their decision to aggressively buy longer term treasury securities caused the 10 year rate to drop from 3.003% to 2.53% in one day! This move provided a key data point in our newest trend line which is rising.

As we run out of room on the lower boundary, unless something really major occurs, rates are probably going to break out to the upside. But there are possibilities for major events. General Motors has just announced a restructuring and as I write, a stock market news commentator is chiding the market. The Dow is opening up down 80 points and the commentator is challenging the markets. 'If you can't keep it down today ...' he says, in an apparent heckle at the Bears. I guess he thinks that the market will shrug off the GM news and eventually rally. If this occurs, then rates will probably rise above 3% today.

Another factor that must be considered is the potential effects of the flu epidemic. I can't think of anything that would rattle the markets more than closing down borders, shutting down businesses, etc because of the flu outbreak. But assuming that the markets will move forward in a normal manner, one might expect rates to break out to higher levels and challenge the two overhead trend lines.

If rates drift to this upper target, one can predict that the rate might hit the 3.6% level in 28 days, when the two upper trend lines converge.

Keep in mind, this blog is not meant to be a recommendation to buy or sell any investment product. Be sure to discuss potential trading opportunities with your professional Financial Planner.

Note Rates Hit 3%

Ten Year Note rates tested the 3.00% level at the end of trading today marking the first time rates have touched this level since the Federal Reserve announced its long-term security purchase intention. Rates continued advancing despite continued weak economic news. Durable goods orders again slipped. Orders data has fallen now in seven of the past eight months.

Concern exists over how the markets will react to an additional $100 billion + in new securities being auctioned off next week. Of this amount, some $30 billion of debt will be in the 7 year, intermediate range.




We had been watching the rising trend in rates. In earlier blogs, we noted that rates were testing the red channel line and mentioned that we were positioning ourselves for higher rates.

Rates tried to fall today after the 1 pm CDT release of the Bank stress test results. Little information was provided on banking weaknesses and the market tone weakened. Stocks gave up much of their earlier rally and treasury rates headed down. But in the final 15 minutes of trading, rates rallied trying hard to penetrate the 3.0% level. Today marked options expiration day for the May Treasury futures making it hard to distinguish what was real market movement as opposed to activity targeting a certain strike price. A popular option strike price was 121-16. Note prices touched 121-165 before finally settling at 121-175.





We believe that the upward move will continue. The Weekly Size chart above shows that volatility is starting to rise. When Size is rising, one should stick with the trend. The moving average on the Size chart is 0.24 while the latest data point is 0.12. Volatility can at least double from the current level.

A longer term view of the note rates show that there is a significant falling trendline that comes in around 3.20. Note rates have not had much success in getting through this resistance level since the downtrend began almost two years ago.




Should rates break above the 3.2% level, expect some resistance at the last low of around 3.35%. While resistance levels could be important, one must consider the magnitude of the move that we have endured. Rates have fallen from a high of 5.2% to a weekly closing low of 2.13%. Note how the stock market has made a major move in the recent two months perhaps only because it has been so oversold. Interest rates, having fallen by so much, could easily rally sharply, retracing much of the down move.

While the Federal Reserve may intervene to keep rates lower, the increasing debt supply, over $100 billion each month, is sure to eventually take its toll on rates. The global market is much bigger than the Fed. While we will have to see how rates react when hitting the 3.2% level, I will continue to position my trading stance for higher rates.

Geitner Reassurances Move Markets

April 21 (Bloomberg) -- Treasury Secretary Timothy Geithner said the “vast majority” of U.S. banks have more capital than needed, stoking a rally in stocks as investors await results of stress tests on the balance sheets of the biggest lenders.

Continuing to be correlated to stock market moves, long term interest rates also rose but failed to break out of the current pennant formation.

Rates Fall as Bank Earnings Disappoint

Friday's advance in 10 Year Note Rates gave us the opportunity to close out our short call position and enabled us to establish one more short put position in the May option series. May options expire at the end of this week.

We sold puts this morning, rates have fallen as bank earnings news gave the market cause to sell off. Continuing to remain correlated to stock market moves, the 10 year note rates also fell, giving us the opportunity to establish our first June position. We just executed a sale of call options.

As I mentioned on Friday, I thought that the price would remain in the pennant and it did. But now, I see that in this moment, the price could hold the 4-day moving average (also a three day test of the low) and tomorrow break out and begin a move to the upward limits of the channel that is defined above.

Bank Stocks - Look Out!!

Bank of America Quadruples! Is it a safe bet?

Bank of America on Monday disappointed investors by reporting a big increase in troubled loans, even as its purchase of Merrill Lynch helped first-quarter profit more than double CNBC article.

All I have been seeing on tv lately is these slick salesy bank CEOs bragging on TV about how they are making money and that all is well. And the public believes them. Look at how well Bank of America has done. Up to 12 from under 3? Look at where the big banking gains are coming from. From TRADING! Not lending, not doing what the TARP money was there for. They are using OUR MONEY to play the market. Why does the government allow this?

Beware! Should the markets again fall or their "marked-to-market" profits begin to fall apart, will Barack and Ben still be there with an open checkbook? Probably.

China's Worries Continue

CHINA FEARS EVENTUAL US INFLATION

China buys short term treasuries, sells long; according to a Bloomberg article published Sunday night. Bloomberg article. "China bought $5.6 billion in bills and sold $964 million in U.S. notes and bonds in February, according to Treasury data released April 15. It was first time since November that China purchased more bills than longer-maturity debt." the article said.

China has publicly spoken out about the US's deficit spending and the potential devaluation of the dollar. I agree that we are headed for high rates of inflation in the future and have been advocating owning hard commodities including oil, gold and even selected REITs. (I recently purchased some Boston Properties BXP). The Federal Reserve says that they can avoid future inflation by removing the stimulus money from the system. To do this successfully, timing is criticial. Can they do it?

Remember, it was only a couple of months ago that they realized that we have already been in a recession for a year! Don't count on the Fed to do anything right. Ever! Maintain a short position in long end treasuries.

Volatility Plays Provide Gains

VOLATILITY THE KEY TO CONSISTENT GAINS

As I mentioned in previous blogs, Volatility is a key indicator that needs constant monitoring. When markets are trending, my volatility measure advances. The rule is to stay with the trend. When Volatility begins to lose strength, there is a good chance that the price movements will lose their magnitude. The move runs out of energy. In times like this, you can take advantage of the lull by selling options. By selling options, you can lock in some of your gain and get paid for the time value of the option. For the most part, you will only see me selling options in my blog. More about this in the future.


BLOOMBERG ARTICLE

“Big currency moves are behind us,” said Maxime Tessier, chief of foreign exchange at Montreal-based Caisse de Depot et Placement du Quebec, Canada’s biggest pension fund manager, with C$120 billion ($98.6 billion) in assets. “The volatility spike has to unwind itself over time. Selling volatility has been the winning trade so far this year and will continue to work well.” Bloomberg article.



READ FUTURE BLOGS

Follow my trades and you will learn what it has taken me 20 years to learn. While there is some "feel" to trading that can only be gained from years of experience, one can easily learn and master the tools needed to time your transaction.

Rates Rise - Where's the FED?

Prices on the June 10-year Treasury Note contract fell today as economic data was not as bad as expected. Also exacerbating the situation was a lack of buying on the part of the Federal Reserve. Notice the big spike up several weeks ago when the Federal Reserve announced that they would buy $300 billion of long term treasury securities. With the exception of the recent pop in prices that we predicted in earlier blogs note prices have since been retreating and are almost back to the Pre-Fed announcement levels.


I was a day early in our closing out the short put positions. Today I was happy that I had closed out the short puts the other day. Today I was in a good position to sell puts for a good premium. For risk management sake, I only have one short put and one short call position for each $10,000 invested.






Currently, the 10-year rate is at 2.94 at 12:45 central time. It is breaking out of the pennant formation and could advance on to the top of the price channel. By selling some out of the money puts, I'm am betting that the rate will back down into the pennant by the end of the day. Still volatility levels are low and even with all of the supply concerns and good earnings reports that are coming out; it's important to keep in mind that bank earnings might the products of manipulation and are not as good as they are now appearing. While rising interest rates (and falling note prices) indicate that the economy is gaining strength, I'm not quite yet buying it.

Bond prices might rise early next week one more time before falling. I wonder though how high the Fed will allow rates to rise before stepping in to drive rates down. While I expect rates to rise much higher in the long term, the threat of Fed intervention is always present. While this is disappointing for trend followers, it should present good trading opportunities. As such, with stochastics at the low end, I am taking the chance that prices will rise from current levels, providing a profit opportunity for the new short put position. I will also have the opportunity to establish a short June call position since the May options expire next Friday.

Are Interest Rates Bottoming?

Poor Retail Sales Hit Rates

Gary Lewis

Asset Design Center

After weeks of optimism over improving bank earnings, reality slapped investors back to reality with worse-than-expected retail sales numbers in March. Interest rates, which had been climbing prior to the data's release dropped sharply as sales numbers came in at minus 1.1% instead of the plus 0.3% that economists were expecting.





I had mentioned two weeks ago that while I expected rates to rise sharply, there would probably be one pullback. We had sold short put options and bought call options in anticipation of this move.

With rates dropping down to 2.81%, and June 10-year notes rallying to 123-14, I covered the short puts and sold the long calls. The position is now bullish for rates and bearish for the Treasury Notes.

As you can see from the chart above, while we didn't realize the three week test of the low, we could be none-the-less finding support at the trend line shown in red. The week is still young though and how this chart will look at the end of the day on Friday is anyone's guess. Perhaps I am early with my position shift but with more bank earnings and other data due out the rest of the week, markets could turn in an instant and move sharply.

We see this morning that Goldman Sachs earned billions of profits in it's last reporting period. With all of the money that the government has pumped into banks and all of the losses that were avoided by AIG paying off banks such as Goldman Sachs in full, one has got to expect some spectacular earnings numbers coming out. Strong numbers SHOULD reflect in higher interest rates UNLESS the market sees through the market manipulation. Still though, the charts indicated that rates should move higher. Whatever news will drive this is anyone's guess. Perhaps in the end, too much additional government debt will come home to roost and investors will demand more return to compensate for the increasing risk.

Ten Year Notes Set to Rise This Week

Ten year treasury yields rallied sharply last week despite less than favorable economic news. Unemployment numbers continue to rise and other data points continue to be negative. But despite poor economics, both the stock market and interest rates rose.

As mentioned last week, we were short both calls and puts on the futures. The rise in rates caused the future to drop sharply, making our May 126 strike calls virtually worthless. The positions were closed out winning nice profits.



The chart above shows the weekly interest ten year rate while the chart below shows the June ten year note futures contract. In examining the charts, notice how we may be setting up for a decline in rates and a rally in the futures. You can see that in the rate chart, the moving average is still declining pretty quickly. While rates advanced above the trend line, I would say that it's still too soon to play rates to go up. But the picture may change next week.

Looking at the futures chart, you can see the three-period pattern developing here. I would expect note prices to rally and try to take out the highs of three weeks ago. And, perhaps the rally will break through the double top and accelerate to still higher highs.

With this in mind, I purchased May 125 calls near the close of the day on Friday. I am also short puts so the position is very bullish. Should we fail to take out the previous highs or if we don't close above the closing price three weeks ago, I'll probably be reversing my position, expecting a big drop in notes.

On the positive side, as I mentioned in earlier blogs, it seems that interest rates and the stock market are starting to be correlated. If this correlation should hold true, expect the stock market to fall some this week. But this might be the last chance we have to get on a move that could take the market substantially higher.

RIMM Shares Surge in After Hours Trading

Shares of Research in Motion (RIMM) surged nearly 25% in after hours trading today after reporting earnings of $0.90 per share. Analysts were expecting just $0.84 per share.

The Asset Design Center's TRENDSETTER reported on RIMM in its end of the month report Saturday night as one of the tech stocks we were buying to start the month of April. Those with core portfolio positions acquired the stock at $43 yesterday morning. Shares were trading at 60.58 in evening trading.

We also purchased Qualcom (QCOM) at 38.27. Qualcom has also participated in the rally jumping nearly 8% to 41.31 at the close today.


Another Core Portfolio stock, Monsanto (MON) reported earnings today. Before extraordinary items, earnings came in at $2.16 but after extraordinary expenses, earnings of $1.97, were less than analysts' $2.20 estimates.

Behind the numbers, Corn and Soybean seed sales surged in the quarter ending February 28. Seed sales overall surged 20% in the quarter. Year over year revenues increased by 8.3%. After soaring to 85.75 interday, shares settled back to 81.41. Still, overall Monsanto is one of our core portfolio's best performing stocks, up this year more than 15%. Our position was further enhanced with the sale of out of the money Leap Puts which have added to MON's position profit.

Other strong performers are Kohls, (KSS) which we added at the begining of February (up 29.6%) and Potash (POT), up 15.76% on the year. Overall, the core portfolio is up more than 5% year-to-date.

Case.Shiller Real Estate Index Falls Again

Case/Shiller Real Estate Index Falls Again

S&P Case/Shiller Home Price Index data released this week showed that home prices in every region of the country continued to fall.

Tuesday’s 2.5% decline marked the 31st consecutive month that home price data has fallen. The 10-city index has been falling steadily since June 2006 with prices falling some 30% from the peak. For the year, the 10-city index has dropped 19.5%.

EXODUS FROM PHOENIX

Phoenix has been hit the hardest with home prices falling 5.5% in the month month period ending on January 2009. For the year, home prices in Phoenix have fallen 35%. Las Vegas and San Francisco have also experienced 30+% price drops in the past year.

Dallas, Cleveland and Denver have held up best in the past year with these cities experiencing moderate declines of around 5%.





While real estate has done poorly in the past five years, over longer periods it has done well, especially in New York, Washington and Los Angeles. Only Detroit, which is now depressed because of the failing auto industry, has lost value in the 10 year period.

Those who have used real estate as a long-term wealth building strategy will be happy to know that on average, residential real estate has gained 75% on average compared with a 35% loss in the stock market as measured by the S&P 500.




While the housing price index remains well above the stock market index over the ten year period, it may not yet be time to get back into either market. If real estate and the stock market are both hedges against inflation, then perhaps neither market is the place to be. In this moment, there is little worry about inflation.

Interest Rates Set For Upmove

INTEREST RATES SET FOR UPMOVE

Monthly Report - Part 2

Long-term interest rates fell in March but as the chart of the 10-year interest rate index (TNX) illustrates, the rate found support at the 4-month moving average and appears to have successfully completed a three-month-test of the lows. With this in mind, we need to be looking for an entry position to be short treasury bonds and notes. For those with a heavy bond allocation in their investment portfolios, be sure to have your adviser monitor this and shift out of long term bonds to a shorter maturity or cash.

On a shorter-term outlook, the 10-year rates appear to be continuing to head lower so you may wish to hold off before making a decision. I will watch it closely so you can monitor the blog to see when I take action. As the weekly note rate chart below shows, the rate has been hitting overhead resistance and appears to be headed lower.




Lower rates seem to be the normal thought now as employment numbers continue to worsen and the potential bankruptcy of General Motors and Chrysler weigh heavy on the market. First quarter earnings will be coming out as well. While few have high expectations for improved earnings, reports coming in at worse-than-expected levels could send shivers through the Treasury markets, especially considering the rosy reports banks were giving recently, telling the public that January and February were profitable months. The final wildcard is the Fed. What kind of impact will their purchases add on rates?

The weekly chart illustrates the persistant downtrend on rates with significant resistance coming in at the 2.83% and 2.91% levels making it hard to reconcile the monthly chart showing the potential for a directional change in rates. But it could happen. In general, the treasury market is spooked by the heavy supply of bonds, notes and bills that are continually coming into the market to support the trillions of dollars in spending that President Obama is proposing. When this thought prevails, rates rise. Another factor that cannot be ignored is the G20 meeting that is about to get underway in Europe. News about the dollar could have an impact on rates.


VOLATILITY LEVELS LOW





The volatility level for the 10-year note continues to drift lower and lower and is currently well below the average. For bond and note option premium sellers, this low level of volatility needs to be taken into consideration before selling short. Not only does low volatility translate to low option premiums, there is also the risk that a volatility spike could turn your far out-of-the-money options into in-the-money positions.

I will be watching for a bottom in the rates. At that time, you could consider a number of instruments to take advantage. For stock portfolios, consider the Short and Ultra Short Bond ProShares. These instruments will rise in price as interest rates rise. For well-capitalized players, consider entering into a short 30-year bond or 10-year note futures position to maximize your profit potential. For those who wish to make some money with less risk, consider selling out of the money bond and note call options.

Be sure to work with a futures investment professional to advise you on such strategies. Futures trading is very risky but when done right, can give you great profits in any kind of market.

OUR MARCH OPTIONS RESULTS

Despite the low level of volatility during March and the sharp move in price caused by the Fed’s announcement to buy long-dated treasuries, our futures options trading positions returned $915 per $10,000 investment net of transaction costs. I enter April short options with a bias to the upside for bonds. I will be watching for a reversal soon and expect bonds to fall by the end of the month.