Tuesday, July 15, 2008

Breaking a Trading Rule

I want to hi-light the U.S. long bond. The vehicle many use for trading this is known by it's ticker the TLT (chart above). Readers know I got short this via the Ultrashort 20yr treasury ticker TBT. So when the TLT goes down in price my long position in the TBT goes up. In speculating parlance this makes the TLT the underlying security and the TBT a derivative upon it. Sorry for the minutia, but I want to make sure readers understand this clearly.

That being said I got long the TBT 2 days ago on the reversal bar on the chart. It is the large black bar on the chart formed 2 days ago. We seem to be creeping up that bar yesterday and now today. I am long at $68.70 and with it currently trading at $66.90 I am showing a loss.

I want to add to the trade today, but this would break the first rule of trading which is to never ever add or increase to a losing position. You must wait until that position shows a profit, (proves you right) before you may add. Just as a general in the field of battle would not commit more troops to a losing battle, we will do the same. Saving our ammunition for winning battles.

I am watching closely the situation with the TLT. We are at a very critical juncture here with the U.S. dollar and bond market. These 2 markets while not followed closely by the general speculating public are watching intensely by 'BIG MONEY'. One of my concerns regular readers are aware of is the concern of foreigners who finance our lifestyle by buying our debt or bonds, may be getting cold feet. It is simple, they buy our bonds en masse, driving up prices and driving down rates, because we had good credit and a prosperous economy. Additional buying always came in in times of uncertainty because in times of stress, nobody was a better credit risk than Uncle Sam, hence the flight to safety.

I believe that 2 days ago the landscape changed. Amidst some panic and fear, global speculators did not buy U.S. treasury notes but rather sold them. This MUST be paid attention to !! Now it remains to be seen if these global speculators and institutions will walk away, scared of our now wanton and reckless bail out nation. Now some may say, hey these foreigners are the owners of Fannie and Freddie debt paper, they want to be bailed out.

Yes, very true. But what good is a foreign debt security paying say 5%, if the currency in which it is denominated, U.S. dollars, depreciates by 20%? Still like that trade? I can assure you that a graduate degree in applied mathematics is not necessary to figure out that this is a bad trade. I believe much of the 'flight to safety' money, if it still wants U.S. treasury paper, will continue to work it's way into the short end, leaving the long end very vulnerable.

So where does all this lead me. I am comfortable being short the long end of the U.S. bond market and that sometimes rules are meant to be bend, not necessarily broken but bent a little. Sounds like a little justification exercise to me. Needless to say, I am breaking the rule today and adding to the trade, buying a 2nd unit of the TBT at $66.90 and sit tight for now.

Good speculating to you all and always remember that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 6 units Currencyshares Japanese Yen ticker FXY @ $88.55 stop at $91.40
Long 3 units Ultrashort Dow DXD@ $50.12 stops $62.22/60.49/58.62
Long 1 unit Ultrashort Financials SKF @ $103.90 stop $161.72
Long 3 units Currencyshares Swiss Franc ticker FXF @ $97.35 stop at $93.82
Long 1 units Ultrashort ReEstate ticker SRS @ $88.95 stop $92.72
Long 1 unit Ultrashort QQQ ticker QID @ $37.05 stop at $41.91
Long 1 unit Ultrashort S&P ticker SDS @ $57.20 stop $61.57
Long 2 units Hecla Mining ticker HL @ $8.50 stop at $7.16
Long 2 units Kinross Gold ticker KGC @ $18.93 stop at $17.56
Long 2 units Ultrashort 20yr Treasury ticker TBT @ $67.85 stop at $65.69
Short 1 unit Daimler AG ticker DAI @ $86.20 stop at $65.94
Short 2 units Brinker Int'al ticker EAT @ $20.07 stop at $19.64
Short 2 units Darden ticker DRI @ $36.35 stop at $35.36
Short 1 unit Lehman ticker LEH @ $43.70 stop at $24.43
Short 2 units Deutsche Bank ticker DB @ $117.03 stops at $93.37/88.34
Short 1 unit of Visa ticker V @ $86.25 stop at $80.16
Short 1 unit HSBC ticker HBC @ $83.23 stop at $80.53
Short 2 units of Netflix ticker NFLX @ $30.35 stop at $29.43
Short 1 unit of IBM ticker IBM @ $122.80 stop at $126.14


Shawn said...

Hi Harleydog,

You are ahead as I write this, so great job on bending the rules.

I am with you in having a TBT position, but I am having doubts.

Aside from the price-volume action, what makes you believe foreigners may be backing away from the long bond as a flight to safety play (I never understood why folks didn't buy shorter duration US treasuries if they were merely afraid).

btw - On July 14, the debacle in the financials continued the inverse trend between TBT and bad news in the US financials.

So, is there really a reversal in the foreigners buying long-dated treasuries on bad news as a flight to safety??

Based on El-Erian's views on foreigners slowing down their purchases of long US bonds(via diversification or more rational investing), Bill Gross's view on the long US Treasury and Ken Heebner's thoughts on inflation; I built a 2,900 share position in TBT with an average price of about $72.00.

As TBT traded into the mid-60's, I forced myself to reduce my holdings to 1,500 shares (trying to follow basic loss cutting rules - it was hard). We have CPI tomorrow, so hopefully we will get a bounce in TBT.

It's surprising to me that there is so much "disagreement" among the "experts" about inflation vs deflation. E.g. Ed Hyman predicted lower 10 yr rates in 6 and 12 months in Barron's yesterday.

Also, Jimmy Rodgers said on Bloomberg yesterday that he was short the long US treasury.


Harleydog said...


thx for your comment and thx for reading.

As for your doubts, sometimes the hardest trade is the best trade.

As for CPI, news conforms to the tape, and I while I can and am often wrong the tape on the TLT does say down. I like that it has failed here into the 2nd round of the credit crisis and made a lower high.

It is always nice to have smart company (like Jimmy Rogers) in a position but I still let the charts govern my trading, shame that Joe Lewis(BSC) and Carl Icahn (YHOO) didn't also.

Continue to ALWAYS use stops and you will will live to trade another day and catch the big move.

As for the disagreement on Inflation/deflation it is understandable, but the inflation guys underestimate the enormity of the credit destruction. As for me I will switch sides in a heartbeat if the charts and facts tell me to !

Continued success to you.