Responding to an Irrational Market

I see very little conviction when considering the behavior of the market (huge gains one day, followed by losses which erase them the next), and it seems to be reacting only to the headlines, since our fundamental standing is always being jumbled by news reports and speculation (like Lehman finally having a buyer). There is no sector which is attracting people's money, and this could be a significant driver behind the confusion and volatility.

That said, there is always ProShares UltraShort Lehman 7-10 Year Treasury ETF (PST) which effectively shorts the price of the 10 year note at 200% (you are betting that the yields will go up). This would be the best bet for a Bernanke rate hike, *which is followed by a higher yield in the treasuries*, or a bet on our credit markets returning to normal, on a 10 year horizon.

Just in case you don't believe me, the time in which the yield on the 10 year flew up 100bps (2004), as highlighted with the red trend lines, was when Greenspan began to incrementally raise interest rates (from 1% in June to 2.25% in December). We witnessed the inverse of this phenomenon this summer (2007), when Bernanke began to cut the federal funds target rate, as highlighted with the blue trend lines, and the yield on the 10 year plummeted 150bps.

PST is trading on its 52 week low, as the yield on the 10 year is a mere 3.75%. Should you believe that Bernanke will have to raise the target rate in the forseeable future, then this ETF is a good bet.

Disclosure: Long PST.

Comments

[carey_jim:]

It looks to me like a pure trader's market. The most astute traders can make money in this kind of market by speculating on rumors, changes in weather, politics and other "ouija board" effects.

If you don't get up very, very early every morning or follow someone who does, stay out of the markets or at least keep 90% of your powder dry (if possible!)

2008 Sep 03 01:25 PM

[Steven Hansen:]

right now i would not bet bananas on anything.

2008 Sep 04 05:33 AM