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The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
What the 'Dumb Money' Is Betting on TodayBy
Saturday, January 14, 2017
 It's one of the few constants in the financial markets...Popular investment ideas are usually losers.
As we often preach, it pays to be a contrarian. Or as billionaire investor Warren Buffett has famously said, "Be fearful when others are greedy, and greedy when others are fearful."
Whatever phrase you choose... whenever the "crowd" is heavily betting one way, it's often a good time to take the other side of that bet.
We were reminded of this fact when we saw the Commitments of Traders ("COT") report on the U.S. Treasury market earlier this week...If you're not familiar, the COT is a weekly government report that tracks the bets of different types of traders in different futures markets, including U.S. Treasurys.
In simple terms, the two main types of traders are industry professionals (who use futures to "hedge" or insure against losses) and speculators (often called the "dumb money" because they tend to get bullish at market tops and bearish at market bottoms).
Speculative bets against Treasurys hit a record high last month...In the December 12 Digest, we warned that this suggested at least a short-term rally in Treasurys – and a decline in interest rates – was likely. (Remember, bonds and interest rates trade inversely... As interest rates fall, bond prices rise, and vice versa.)
As you can see in the following chart, Treasurys – as tracked by the iShares 20+ Year Treasury Bond Fund (TLT) – reversed just days later, and they've been moving higher since...
 And interest rates – as tracked by the yield on the benchmark 10-year U.S. Treasury note – have been falling...  Typically, following an extreme like we saw last month, we'd expect speculators to begin to unwind some of these bets as Treasurys have rallied...But that hasn't been the case this time. Instead, speculators have been adding to their bearish positions.
According to the COT data, speculative "dumb money" bets against Treasurys hit a new all-time record last week.
So while we believe the three-decade bull market in bonds is ending, this suggests the recent reversal rally has further to run.
Meanwhile, in President-elect Donald Trump's first official press conference on Wednesday, he said less to clarify his proposals on taxes, trade, or fiscal stimulus than some analysts had hoped.While Trump didn't say much about his general policy proposals, he again singled out two industries he has criticized before...
He criticized the cost of the Defense Department's F-35 program, causing shares of Lockheed Martin (LMT) and other defense stocks to sell off.
He also slammed the pharmaceutical industry again, saying companies were "getting away with murder" by overcharging for drugs. "Pharma has a lot of lobbyists and a lot of power, and there is very little bidding," he said.
Biotech stocks – as tracked by the iShares Nasdaq Biotechnology Fund (IBB) – fell about 3% earlier in the week before recovering some on Friday.
If there was one takeaway from Wednesday's press conference... it's to expect more volatility.We still don't have many details on what a Trump administration will look like. It's still unclear how many of his proposals he'll pursue... or how successful he'll be. It's also not clear what other industries or companies could draw the administration's ire in the future.
So we won't be surprised to see erratic market swings as more details emerge in the coming weeks.
If those details fall short of Trump's big promises, the recent reversal could accelerate as markets give back their post-election moves.
On the other hand, if Trump is successful in pushing through his proposals, the next few years are likely to create more winners and losers among sectors, companies, and even countries than we've seen in recent years.
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Regards,
Justin Brill
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