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The Smart Money Crowd Appears To Not Be So Smart


An update on CFTC data and the positioning of the hedgers or 'smart money crowd.'

For the moment, the smart money crowd appears to not be so smart. They remain short approximately 400,000 10 year contracts, which is a record (or near record) in the face of falling rates/rising prices. See the chart below.

Usually, they sell strength (lower yields) and buy weakness (cover shorts on higher yields) but in this case it seems they are off-sides. For now at least. And keep in mind that this data is as of Tuesday, so we don't know what happened to their positions as rates really fell into the end of the week and continue to fall this morning.

See the second chart below which shows an overlay of their positions in 10 year futures versus yield, which obviously has an inverse relationship to price.

I would note that all parts of the curve are technically overbought and ripe for a pullback, but you have to admit (I am anyway) that this is one strong Treasury market. Someone smells blood and my firm's long held belief, since early 2006, that the Fed will ease by early 2007 is still our belief. We no longer think it is question of 'if' or even 'when' they cut rates but at what speed they cut.

My firm notes weakness in housing, the action of stocks like Caterpillar (CAT) and numbers like the Philly Fed and recent inflation numbers. It reeks of recession on the horizon as the curve gets more and more inverted. And with all of the coordinated bubbles around the world that, as mentioned last week, could simultaneously blow up, we are most definitely in the hard landing camp. That is what my firm believes (while not advice), that the crowded trades turn into 'pain trades.' A pain trade, of course, is defined as that in which Mr. Market has a way of punishing the majority at major turning points.

Finally, the hedgers positions in S&P's and the long bond remain about the same, but we would note that 'small traders' - usually wrong-sided I might add - are heavily net short when adding together the large S&P contract and smaller e-mini contracts in total. See the chart of the positions of hedgers in the long bond.

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