Tuesday, February 28, 2012

Commodities: Agricultural Bull!

Introduction
After more than a decade of rallying and constantly making new highs, Commodities still remain in a secular bull market. However, if one was to watch CNBC or Bloomberg on a regular basis, majority of the the pundits are still talking about how stocks will have massive bull market any day now...
The truth is, since the US equity markets topped in year 2000, the best equities have done is pretty much go sideways and create no return over the last decade. If adjusted for inflation, equities have actually lost between 30 to 50 percent, depending on the index tracked. On the other hand, during this time commodities have continued making all time new highs and every one of the corrections has produced a higher low. This is typical behaviour of secular bull markets.

One of these lows has just occurred in December of last year, according to the equal weighted Commodity Index (chart above), so investors focus should once again turn to raw materials. However, just like the stock market has sectors and sub-sectors, so too does the Commodity Index. So the question here is, which sectors should one focus one as of today?

Energy Overbought
Just like the S&P 500 or Nasdaq Composite, Continuous Commodity Index (CCI) is also one big giant Titanic ship, which takes time to navigate. A huge ship cannot just turn around like a speed boat can. It takes time and the various components of the ship have to be placed in the right position or direction, for the turn to eventually take place.

The same concept applies to sectors of the CCI. These include Energy; Agriculture with three sub-sectors which are Grains, Softs and Live Stock; and finally Metals with two sub-sectors which are Industrial and Precious Metals. Major sectors of focus should always be Energy, especially focused on Crude Oil, and Agriculture as they hold the largest weighting. As we can see the in the chart below, CCI finally bottomed in December 2011, but Energy was first out of the blocks in October 2011. The final low came as Agriculture bottomed in middle of December. Titanic has now turned, so does that mean we should go out and buy all commodities?
While the answer could be yes, I prefer not to purchase Energy right now. As we can see in the chart above, it was Energy that bottom first within the overall broad Commodity picture, together with S&P 500 on October 04th 2011. Since than, Energy Commodities, excluding the Natural Gas sell off, have rallied very hard. For example, West Texas Crude Oil has rallied from $75 a barrel to almost $110 a barrel in the last couple of days. That is a rally of almost 50%, which makes me very uneasy to consider it as anything even remotely close to a good entry point.
Energy sector as a whole, now reads the highest cumulative net long positions in the history of weekly COT reports. In other words, when we add up all investor bets in Crude Oil, Gasoline, Heating Oil and Natural Gas, investors are now the most optimistic they have ever been. Main reasoning behind this occurrence is the large number of bullish bets on Crude Oil and Gasoline as the possibility of Iran War increases.
Furthermore, Daily Sentiment Index on Crude Oil has now reached 94% bulls as of late last week. These type of bullish extremes have only been reached a handful of times over the last four years. What eventually follows is either a major pullback (5% to 10%) or a serious correction (10% plus). So if Energy is not the sector to buy right now, what is?

Bull In Agriculture
I'd say it would be Agriculture. It is important to break Agriculture into two different sub-sectors: Grains and Softs. The chart below shows the Dow Jones Grains Index, which experienced a panic sell off in September, similar to many other commodities. I usually call this a selling climax.

What I mean by selling climax is the peak in selling pressure within a downtrend. It is a signal that majority of the selling has exhausted itself. While prices can go lower afterwards, all we are going to be doing is diverging prior to the actual low. It is quite similar to what occurred with S&P 500 in October 2008 (selling climax), followed by March 2009 (actual low). That is precisely what occurred with Grains in 2011 on a smaller scale and the low placed in December was bought by our fund (Article: Portfolio Update - Long Agriculture).
From here onwards, Grains have created the first higher low, which negates sellers ambitions to push prices further down. That lets us know the bear market has been stopped for now. What we need to see going forward, is a first higher high and a break above the resistance line I drew in the chart above. This will signal that bulls have returned and the price trend has entered a new bull market.

When it comes to Grains, personally I am the most optimistic with Wheat. This view I personally hold is quite contrary to the belief to almost every other trader, investor and media outlet out there. As a matter of fact, fundamental news continue to be extremely awful for Wheat investors - a perfect recipe for a contrarian investor! Here are some of the stories that have been doing the rounds in the media over the last few weeks:
Media reports on Wheat have been amazingly bearish not only in the last few weeks, but to be quite honest, since October 2011. The price, however, refuses to go lower and has not closed below $6 per bushel in serious fashion. Usually news of excess supply occur around bottoms, while news of shortages and panic buying occur near market tops. A wise investors needs to do the opposite.

It was Marc Faber who first taught me long time ago, that when a price of an asset fails to make a new low on unfavourable news, it could be starting to price in more favourable conditions. The same is true for an asset that fails to make a new high, under very favourable conditions.
As we can see in the chart above, investors hold close to record high net short positions in the Wheat futures market, while we consolidate just below the 200 MA. Grains, and Wheat in particular, have failed to make new lows on various bad fundamental news, which means current record selling has discounted the present conditions and I believe the price is now ready to start discounting future conditions, which will be more favourable. Those who read the blog on regular basis, should also remember that one of my main outlooks for 2012 is for Wheat to surprise everyone with a super rally to the upside.
Soft Commodities on the other hand still remain depressed and in a bear market. No one is 100% sure if the bottom has been witnessed during the December low when CCI itself bottomed together with Grains and Metals. We haven't witnessed a powerful move out of the lows, which usually signals strong buying interest. Having said that, this sector remains a major laggard and therefore a good opportunity because equities, junk bonds, high yield currencies, energy, metals and other risk assets have rallied in recent months, while Soft Commodities remain oversold and pretty much flat.
Looking at the long term chart of Coffee, a major component of the Softs Sector, we can conclude that the cyclical bear market over the last 12 months is now getting quite oversold. On top of that, quite contrary to the Crude Oil, Daily Sentiment Index on Coffee currently stands at only 9% bulls as of last Friday, while COT report shows investors are close to shorting Coffee futures - a very rare occurrence which usually signals bottoms. Sentimentrader's Public Opinion is also depressed and at levels where long term bottoms usually start to base out.
Sugar is also showing signs of improvement after a long bear market, which topped in February 2011 at 36 cents a pound. You might recall last year that I bought Sugar futures at the May bottom around 21 cents and than sold them again in August at 30 plus cents (Article: Portfolio Update: Profit Taking On Sugar). That was all part of an oversold bear market rally. What we have now is the refusal by the bulls to let the prices lower than 23 cents and at the same time, a long drawn out base formation in progress. This is a very favourable occurrence, from which prices could stage another leg of this secular bull market. Sugar is probably the most depressed commodity in both nominal terms as well as in inflation adjust terms when compared to its historical highs in 1970s and 1940s.

Summary
Energy has had a super run since October 04th 2011, so I think we are due to for a correction around these levels or slightly higher from here ($115 resistance on Crude Oil). Currently, the sector as a whole displays signs of greed as speculators place bullish bets to record highs, while expecting tensions between West and Iran to rise. I have never been a fan of buying assets when majority are bullish, so I recommend adding no new exposure to energy as of today.
On a completely different note, Agriculture is where the true opportunity exists. In coming sessions, Grains have an above average chance of breaking out into a new uptrend from a basing bottom. Wheat especially looks very good here, with close to a record net short position. On top of that, Softs still remain oversold and probably represent the best opportunity for fresh money to be deployed in coming weeks. Similar to what occurs within the typical Equity Index sector rotation, we could now see sector rotation also occur within the Commodity Index, where Agriculture takes the pole position away from Energy and Metals.

Disclosure: As of the recent cyclical bear market lows in commodities, my fund holds exposure to index of all Agriculture as of middle of December of last year; and exposure to Physical Silver as of late December of last year. The fund has no positions in Energy Commodities. My own personal trading account, also holds Silver futures on COMEX with a high leverage as of late December and I have recently bought both Grains and Softs as a trade too.

Saturday, February 25, 2012

Global Macro Update: Investors Add To Commodities

Global Macro Update
Equity Sentiment: Newsletter advisors track by Investor Intelligence Survey, slightly increased this week. According to this indicator, we are still no one near warning signals of a potential intermediate term market top, while at the same time advisors are no where near extreme bearishness warning us of a potential intermediate term market bottom either. Reading: Neutral.
Equity Volatility: Volatility Index track by CBOE, remained below 18 this week, as we slowly approached the 16 handle. According to this indicator, we are have reduced volatility near levels where the market could, but doesn't necessarily have to, top and sell off. Reading: Bearish.
Bond Sentiment: US Treasury 30 Year Long Bond yields refuse to rise in substantial manner despite a huge improvement in economic data, track by the Citigroup DMs Economic Surprise Index over the last couple of months. According to this indicator, yields should be trading at higher levels around 3½ to 4%, however various Fed programs have artificially suppressed this market. Reading: Bearish.
Credit Spreads: The spread between Merrill Lynch High Yield Bonds and equivalent maturity US Treasury Notes, continue to narrow again. According to this indicator, we are witnessing an improvement in the corporate credit market, which is a positive outcome. Reading: Bullish.
Gold Sentiment: GLD fund flows, tracked by a monthly 4 week rolling average, continue to show inflows into Gold, increasing this week. According to this indicator, investors are definitely more bullish on the precious metal, compared to large outflows we witnessed at the end of 2011. Reading: Bearish.
US Dollar Sentiment: Positioning on the US Dollar, tracked by the CFTC Commitment of Traders report, showed that investors are still bullish, despite the recent sell off over the last several weeks. According to this indicator, investors became overly bullish on the US Dollar at the start of 2012, which most likely was a strong signal of a top. Reading: Bearish.
Commodity Sentiment: Positioning in the Commodities market, tracked by the CFTC Commitment of Traders report, showed that investors are are becoming more bullish on the asset class again this week. According to this indicator, investors became overly bearish on Commodities at the end of 2011, which most likely was a strong signal of a bottom. Reading: Neutral.
Agriculture Sentiment: Positioning in the Agricultural Commodities market, tracked by the CFTC Commitment of Traders report, showed that investors are are becoming more bullish on the asset class, however only added slightly this week. According to this indicator, investors became overly bearish on Agriculture at the end of 2011, which most likely was a strong signal of a bottom. They still remain close to those bearish levels. Reading: Bullish.

Market Cycle Update
New Highs And Lows: The ratio between 52 Week New Highs and Lows, tracked by the NYSE data which is one of the most broadest indices out there, showed that bulls remain firmly in control of the market trend. We do have a short term cautious signal, where equities keep moving higher on closing basis, while the 52 Week New Highs has failed to follow through. Having said that, we have no significant or major divergences that usually signal a major market top just yet. Reading: Bullish.
Advance Decline Line: The ratio between Advancers versus Decliners, tracked over 21 days or one month by the NYSE data which is one of the most broadest indices out there, showed that advancing breadth is still in control of the market trend. We do have a short term cautious signal in this indicator as well, where equities keep moving higher on closing basis, while the Advance Decline ratio has failed to follow through. Having said that, we have no significant or major divergences that usually signal a major market top here either. Reading: Bullish.
Trading Above MAs: Overall market health as well as the current trend, can best be determined by following sector components trading above various moving averages, tracked by the NYSE data which is one of the most broadest indices out there. As we can see in the table above, over the short term perspective only two sectors are in a downtrend, while over the medium as well as long term perspective only one sector is in a mild downtrend for each measure. Majority of sectors are showing both medium term as well as long term breadth strength. Reading: Bullish.

Friday, February 24, 2012

Portfolio Upate: Performance Updated

Performance updated up to the last trading day of week in February (Asian time) - link here or click Portfolio Performance in the tool bar at the top of the page.

Wednesday, February 22, 2012

Economy: Business Cycle Update

Introduction
It has been awhile since I updated the Business Cycle outlook, so I think it is time for us to see how the global economy is performing as we slowly approach March. The last time I took the time to write about the global Business Cycle (Articles: Part I & Part II) in November of last year, I concluded the following:
"The global economy is still growing. That is a fact. And where there is growth, there is a rise in profit. That too, is also a fact. Therefore equities globally are still hanging in there.
...there are also some possible positive signs which show us Prices Paid Index that is falling could reduce margin pressure over the coming months and push global PMIs towards a recovery into the 1st quarter of 2012. This could really back foot perma bears as the equity market will do a mother of all short squeezes..."
Business Cycle
The quote section in the introduction, which was originally written in November 2011, pretty much outlined what happened into the first quarter of 2012. What we saw was a recovery in the global PMI indices, which resulted in a strong S&P 500 rally from 1150, towards 1360 today. So how is the global economy looking like right now?
When following the global business cycle, I tend to use variety of indicators, some of which are financial, some of which are leading and some of which are economic lagging. When we look at the chart above, we could assume the following:
  • At the same time, US equity earnings remain at record highs within the current business cycle. Same can be said with Profit Margins, shown in the chart above. It should always be a known fact to investors (not traders) that the best time to buy stocks is when margins are depressed and when earnings are down. Therefore, common sense states that investing in stocks right now, does not make a lot of sense when profit margins and earnings are at record highs. Obviously, this is not a timing indicator for traders, so I am not advocating a recession will begin tomorrow. I am actually quite optimistic for 2012,, but after that some serious problems could start to occur.
  • Exporters and manufacturers in both Germany and Japan are still decently confident that the current business cycle will keep expanding. Japanese Tankan survey indicates that conditions are slowly deteriorating, but things are not serious just yet. Their main problem is the strength in the Yen and the weak global demand. Quite to the contrary, German lfo survey of 7,000 CEOs running manufacturing companies, indicates that these business leaders still see further expansion in the current business cycle. Finally, manufacturers in United States are also regaining confidence that the business cycle will keep expanding, as the ISM continues to expand.
  • Major conundrum in the leading indicator space comes as Weekly Jobless Claims data keeps improving in the US, while the ECRI Leading Index is not signalling the recovery is as strong. As a matter of fact, S&P 500 has made intermediate peak in April 2010 and than a higher peak later in May 2011. Weekly Jobless Claims have confirmed this rise, while ECRI's intermediate peaks have been diverging with the stock market since April 2010 - a worrying sign that equities are just running higher on money printing. Which one is right and which one is wrong?
Summary
The economy and the stock market are two different animals. As stocks tends to lead the business cycle, a contrarian stance always needs to be taken on board when viewing economy. What I mean by this is that when the economy is under-performing, with worries of a recession like in August 2010 or September 2011, stocks should be bought. At the same time, when the economic data has outperformed, while profit margins and earnings remain at record highs, one should at least take a cautious stance as an investor (not a trader). This is definitely not the time to be deploying new capital on a large scale.
From the short to medium term perspective, we can see in the chart above thanks to Citigroup Economic Surprise Index, the stock market has definitely priced in majority of the improvements in economic data since the August of 2011. That could signal a potential for the data to surprise to the downside in coming weeks or months. Having said that, from the long term perspective, the expansion is still intact in the current business cycle and there are no signs of up-and-coming recession. Nevertheless, caution is still advised as record profit margins and record earnings will not continue forever in this secular equity bear market. On top of that, it is very worrying to see almost nobody is paying attention to Chinese hard landing at this point in time.

My advice is to enjoy the growth period for now and hold the bullish stance with the current trend, but be careful as the economy starts to deteriorate near the end of this year. I will come back throughout the year and monitor how the global Business cycle is progressing...

Saturday, February 18, 2012

Global Macro Update: Economic Data Continues To Improve

Global Macro Update
Equity Sentiment: Newsletter advisors track by Investor Intelligence Survey, became less bearish this week. According to this indicator, we are still no one near warning signals of a potential intermediate term market top.
Equity Volatility: Volatility Index track by CBOE, fell this week below 18 again. According to this indicator, we are have reduced volatility near levels where the market could, but doesn't necessarily have to, sell off.
Bond Sentiment: US Treasury 30 Year Long Bond yields refuse to rise in substantial manner despite a huge improvement in economic data, track by the Citigroup DMs Economic Surprise Index over the last couple of months. According to this indicator, yields should be trading at higher levels around 4%, however various Fed programs have artificially suppressed this market.
Credit Spreads: The spread between Merrill Lynch High Yield Bonds and equivalent maturity US Treasury Notes, continue to narrow. According to this indicator, we are witnessing an improvement in the corporate credit market, which is a positive outcome.
Gold Sentiment: GLD fund flows, tracked by a monthly 4 week rolling average, continue to show inflows into Gold, however at much more subdued level. According to this indicator, investors are definitely more bullish on the precious metal, compared to large outflows we witnessed at the end of 2011.
US Dollar Sentiment: Investor positioning on the US Dollar, tracked by the CFTC Commitment of Traders report, showed that investors are still bullish on the US Dollar, despite the recent sell off over the last several weeks. According to this indicator, investors became overly bullish on the US Dollar at the start of 2012, which most likely was a strong signal of a top.
Commodity Sentiment: Investor positioning in the Commodities market, tracked by the CFTC Commitment of Traders report, showed that investors are are becoming more bullish on the asset class. According to this indicator, investors became overly bearish on Commodities at the end of 2011, which most likely was a strong signal of a bottom.
Agriculture Sentiment: Investor positioning in the Agricultural Commodities market, tracked by the CFTC Commitment of Traders report, showed that investors are are becoming more bullish on the asset class, as well. According to this indicator, investors became overly bearish on Agriculture at the end of 2011, which most likely was a strong signal of a bottom.

Market Cycle Update
52 Week New Highs / Lows: The ratio between 52 Week New Highs and Lows, tracked by the NYSE data which is one of the most broadest indices out there, showed that bulls remain firmly in control of the market trend. We do have a short term cautious signal, where equities keep moving higher, while the 52 Week New Highs has failed to follow through. Having said that, we have no significant or major divergences that usually signal a major market top.

Note: I will be doing a Global Macro summary every weekend from now on. This should help majority of us to keep track on how various asset classes are performing and more importantly, how investors interact with these assets (bullish or bearish outlook / positioning). On top of that I will be focusing on the Market Cycle summary. I hope you enjoy the posts!

Sunday, February 12, 2012

Poll: Where Will S&P 500 Trade First?

With the S&P 500 posting its first weekly decline in 2012, it is a perfect time to review our blog poll on where the index will trade first: 1,300 or 1,400?
As we can see from the chart above, almost two thirds of all who voted favour the S&P 500 to close at 1,300 first, while just a little more than one third think 1,400 will be taken out first. Let us compare that to investor sentiment survey polls, usually viewed as dumb money:

- Individual investors (blue), tracked by the American Association of Individual Investors, this week reached 52% bulls and 20% bears, for a spread of over 30%. The chart above shows that those figures put us in 1.5 standard deviations above mean and slight short term extreme.

- Advisors (red), tracked by the Investor Intelligence, showed a reading of 52% bulls as well, while bears registered a 29% reading. The spread between two camps is therefore not as extreme as we see with the more volatile AAII readings.
- Active managers, tracked by National Association of Active Investment Managers, showed on average a 73% net long exposure on the US equities. We are now reaching 1.5 standard deviations above mean into slight show term extreme readings and are more than doubling last quarters average reading of 31% net long exposure.
- Finally futures traders are once again returning to optimism majority, tracked by Daily Sentiment Index and shown in the chart above. We currently have 72% bulls on Nasdaq Composite, so while not extremely bullish, it could be used as a sign of concern or a potential correction in coming days or weeks.

Summary
It seems that majority of the readers / voters of this blog stand against the majority of retail investors, newsletter advisors, futures traders and active fund managers. Contrarians all around, I guess. As I always say, you're either a contrarian or a victim!
My view remains bullish on risk assets in coming months of 2012. Having said that, I still remain neutral on equities, while very bullish on commodities due to the secular nature of the trends. Sticking to the topic of S&P 500, and looking at the chart above, I would have to fall into the 1,300 first camp. In all due respect, a correction to 1,300 would be decently healthy for the current uptrend, as we have a bullish trend line supporting prices there.

Tuesday, February 7, 2012

Credit: Conditions Are Improving

Introduction
The Western economies are in a secular equity bear market, where the economy is growing below trend as it is plagued by ongoing debt de-leveraging, which is constantly unsettles credit institutions, majority of which are most likely already insolvent and on zombie government life support.

Having said that... no matter how bearish you are, no matter how many books you have read on deflation, no matter how negative the media portrays the current situation in Europe, majority of the time the risk assets will not sell off significantly unless credit market conditions are deteriorating, which creates a lending freeze and ultimately derail the economy like in 2008.

Therefore, at least in my humble opinion, it is absolutely critical not to fall into a trap like so many investors have already done: becoming either perma-bearish or perma-bullish, while constantly arguing with the market on why it should be going down, while its going up and visa versa. Instead, one should listen to the market conditions and understand its message, especially if it is coming from the credit side of things. Lets have a gaze at the current conditions...

Credit Conditions
Libor OIS 3 month rates are currently falling both in the US as wells more importantly in Europe. It seems that the repeat of 2008 armageddon banking scenario was derailed and backstopped in its tracks.
The same type of a message can been from the Libor rates major private banks around the world charge each other when it comes to overnight borrowing. Conditions have started easing around a month ago, obviously linking us to the ECBs LTRO move back in middle of December.
Two year currency swap rates in both US Dollars and Euros has been falling since December 2011, similar to the Libor rates. It is important to note that the banking situation in US is definitely nowhere as bad as the European one, according to this indicator. Why do I say this? While we do have improving conditions across the board, do take note that EUR 2 Yr Swaps remain much closer to the September 2008 level, when Lehman Brothers bankruptcy sent global markets into chaos mode.
Euro Dollar Basis Swaps over a 3 month borrowing period are now also starting to improve dramatically. As we can see from the chart above, the Basis Swaps reached -150 basis points around November and December of last year. Since than, these readings have come in substantially to around -70 basis points.
Buying insurance protection against default in European institutions, through the purchase of Credit Default Swaps, has also come down significantly since the December go last year. There seems to be a similar inflection point at hand, to what has occurred between October 2008 and March 2009, when Lehman Brothers filed for bankruptcy.
Junk Bond spreads tend to signal credit contraction, increase in default rate and a potential recession. As spreads started to widen in 2011, things were looking like a repeat of 2008, however the LTRO backstop has started easing conditions here too.

Summary
It seems that every blog you visit, every technical newsletter you read and every analyst you hear on the television these days is trying to pick a top in the stock market just because it is overbought. Some traders are even getting crazy ideas that just because the stock market might top, they should also short precious metals or the Euro as "correlations" are positive.

To me this seems totally pointless, as one is trying to trade against the prevailing trend. Furthermore, it needs to be stated that this is not contrarian, as contrarians trade with the trend against the majority, while here the majority is trying to act like contrarians against the trend. Sentiment might be slightly over-bullish, however in a bull market investors are meant to be bullish. Usually a correction or a consolidation removes the short term greed and enables prices to move higher.

But more importantly, as long as credit conditions keep improving and the economy keeps chugging along, the stock market should not experience any nasty or large downside surprises. That actually goes for all the risk assets, including commodities. On the other hand, it is only when Credit Markets start bearishly diverging from the stock markets bullish direction that we should be worried. We are no where close to that yet, so for now, as credit conditions keep improving, the trend should remain your friend. Resist the temptation to pick stock market tops!

Saturday, February 4, 2012

Poll: Best Asset Class For 2012?

With the end of January, brings us to the end of the blog survey in regards to asset allocations in 2012. Thank you for all who voted, we really appreciate it. As we can see from the chart below, over one quarter of all who voted favour precious metals in 2012. A close second was Agriculture, with almost one fifth of all votes. Commodities, an asset class that still remains in a secular bull market, received a total of 54% of all votes (more than half).
Other asset classes that were preferred by readers of the Short Side Of Long blog were the US Dollar with 14% of votes and US Equities with 10% of votes. It should be noted that Global Equities received 22% of all votes, while Global Bonds received only 6%.
Altogether, risk assets (Equities, Commodities, Currencies) received 80% of all votes, while safe havens (Bonds, Dollar, Yen) received 21% - with a margin of error being about 1%. While it seems that majority of the readers on this blog being bullish for 2012 is a bit worrying, I would say that it was a contrarian outlook when compared to what Wall Street consensus expected. That would also mean that majority of the readers and followers of this blog would have had a very nice January, when it comes to the performance.

So with the S&P 500 closing just shy of 1350 last night (US trade), over the coming few days or a week, we will be running a poll wondering if S&P 500 will print 1,300 or 1,400 first. Let us know what you think...

Where Will SP 500 Trade First?
1,300
1,400
pollcode.com free polls 

Wednesday, February 1, 2012

Bonds: Treasury Yields Still Too Low

Introduction
Since I wrote the last bond post update back in late November of 2011 (Article: Treasuries Sentiment Extremely Bullish), the 30 Yr Treasury Long Bond price has just moved sideways. My advice back on 22nd of November was as follows:
"...buying Treasury Bonds would be the last thing on my mind. Holding cash is where I am overweight right now, however in Australia we earn 6% interest on our high cash hoard. So therefore, personally, our fund is getting ready to allocate funds to commodities, which we believe are extremely oversold in recent weeks - especially Agriculture. So therefore in summary, I'll keep it simple: short Treasuries, buy Commodities!"
Where I was right is essentially in the outlook that buying Bonds was a mistake, despite awful economic news around the world, including Europe being on fire. Looking back, we can safety say that Treasuries have not created any capital gain since that post. However, I also haven't been right in predicting a decline in bond prices / rise in yields so far either. At best one would have broke even if you shorted the TLT ETF. Do keep in mind that sideway movements do not last forever, so what is next for the government bond market?

Risk Overbought From Short Term
I still maintain my bearish stance on Treasury Bonds, however the overall macro condition has changed a bit in the last couple of months. As you may recall, S&P 500 was quite oversold in late November, so an equity rally and a Treasury sell off made sense. Fast forward to today and while Treasury Bonds are still extremely overbought from the long term perspective, equities have also become overbought from the short term perspective in recent weeks too (Article: Possibility Of A Correction Approaching).
It is safe to say that, while Treasuries have gone sideways for a good few months, equities have staged an impressive rally from 04th of October at around 1075, towards 1,333 in recent days. A move like that makes me think equities are now overvalued relative to bonds over the short term. Furthermore, certain basket of commodities like Crude Oil, Heating Oil, Gasoline, Gold, Silver, Platinum and even Copper have become somewhat overbought from the short term perspective as well. Article I recently read on Bloomberg, stated that equities around the world are off to the best start in 18 years. Dow Jones has posted the best January gain since at least 1997. That type of a move is usually not sustainable on annualised basis and begs for a pullback. On top of that commodities like Crude Oil and Platinum created bearish reversals last night in US trade.
Therefore, it shouldn't be difficult to envision a scenario where risk assets like equities and certain commodities correct for several days or weeks working off recent gains. At the same time, the 30 Yr Treasury Long Bond could benefit under this scenario, where the price could make a break out on the upside. However, I do not think this technical move will be real or sustainable, but rather could turn into a bull trap.

Bonds Overbought From Long Term
The reason I hold this view is because nothing dramatic has changed since late November 2011. As a matter of fact, a further move up above 146 on the Long Bond futures will only make the asset class more overbought from the long term perspective and turn me even more bearish on the asset. One of the reasons Treasuries could be rallying in recent days is most likely linked towards Bernanke's push towards QE3. Therefore, constant arguments by perma bears that Treasuries are pricing in deflation is total non sense.

Official CPI figures are still over 3% [note: who is going to believe that?], while old metrics range from 6% to 10% inflation in the US. Furthermore, CPI tends to follow commodity prices and with the US Dollar putting in a potential top in recent weeks (Article: Dollar Rally Ending Part I & Part II), commodities should do quite well in the in 2012. Therefore, I would expect rising inflation in coming quarters, which builds further case to sell Treasuries.
But our perma deflationist friends would not believe one word of what I stated here. They seem to be blind to the way wise greedy bankers are front running the Fed's actions as they wait for Chairman Bernanke to take Treasuries of their hands in a form of QE3 at higher prices for a nice profit. In purest form, this is money printing to repair / bail-out balance sheets of US financial institutions, similar to what LTRO is doing in EU. Therefore, in due time, I would expect majority of Treasuries that have been bought all throughout the fearful days of 2011 - as we watched Italy and Europe almost fall of the cliff - to be offloaded back to the Fed. As QE3 comes, yields should once again start to rise in a trade formally known as "reflation" or "risk-on".
Furthermore, it is not only Treasuries that are overbought. German Bunds, Japanese Government Bonds (JGBs) and United Kingdom Gilts also fall into the same category. One thing I found interesting is that while the 10 Yr Treasury Note, Bund and Gilt made all time new lows in yields, Japanese Bonds failed to do so. Are investors finally realising Japanese debt problems are even worse than those of Europe, as Kyle Bass has been warning us for a long time already? For those that have the facilities to do so, should definitely consider betting against JGBs in due time as they seem relatively weak compared to other bonds at present. Investors should also pay close attention to the Japanese Yen, which has been strengthening for over four years now.

Summary
Since I turned bearish on Government Bonds in late November 2011, I have not been right as of yet. Treasuries have been moving sideways and are now threatening to break to the upside as stocks and commodities experience a potential correction. Having said that, it is my belief that this move, if it occurs, will prove to be short lived and essentially will trap a lot of bond bull Johnny Come Lately's. I still hold a view that one of the main surprises of the 2012 will be the rise in yields on government bonds, including 10 Yr Treasury yields to rise above 3%. Those bearish on bonds should pay close attention to Japanese Government Bonds (JGBs) in particular, as very rewardable shorting opportunities exist there.

As always discussions and comments are welcome. Do tell me what you think...