US Treasuries...are you kidding me? Sell them...toughest decision is which one to sell!

US Treasuries are bonkers. Bill Gross may run the world's biggest bond
fund, but that probably just makes him biased to be long. How he can
tell people that 10y Treasuries look good value at 4.50% (actually I
think they were closer to 4.40% when he put out his last monthly
update), when the FED is going to be at 4.50% this week, and looking
clearly like they're heading up further. I think on any economic
recovery in such a capitalist economy, you've got to be wary of calling
the top in the rate/economic cycle. I could understand if the ECB hiked
to far they could quickly push the European economy into recession
pretty quickly, but the US economy is incredibly flexible and will be
able to withstand rates of 5%+. That 4Q GDP at 1.1% will probably just
turn out to be a blip, stand back for continued economic growth through
2006.

So with the risk being that the FED keeps going more than the market has
priced in, where do you best get paid to be short if 2y/5y/10y
Treasuries all trade at ~4.50%? I've placed my bet today by shorting
10yr March Futures at 108.50 in £10 a tick (that's a 10y yield of
~4.53%), but looking at it now, maybe 5y is the point on the curve to
place that bet.

Anyway, I figure by going further out the curve, you hedge the risk of
the FED pausing too early...picture it, if Bernanke doesn't hike in his
first meeting in March, the market is gonna take that to mean he isn't
firm enough in controlling inflation (and inflation expectations) and
that curve is gonna steepen right up. And if Bernanke does hike to
4.75%, the market will still price in some probability of further hikes,
so seems to me that 10yrs will struggle to hold yields as low as 4.53%.
Sell it ASAP. Lets aim for 5%, but really, even if 10s went to
5.25-5.50%, they still don't look cheap if the FED was at 5.00%.

BT stock...think what the market will think 6 months from now.

OK so here's a UK stock i like...a lot. BT (British Telecom), currently
trading at 209p with market cap of £19bn.

BT is going to be bringing out technology in September this year which
will deliver movies over the internet via set-top boxes on TV's. This is
just about the hottest technology out there at the moment, its what
every company wants to be in and is ultimately the future of how
TV/Movies will be viewed at home. Google's share price has benefited
from their involvement in exactly this technology, but BT's huge retail
base (it basically has phone lines into every home in the UK) and the
difficulties for competitors to deliver the same service (due to not
having these connections into every household) means limited
competition. This technology is going to make the likes of Sky+ look
dated very quickly.

BT stock is not particularly far from multi-year lows of ~150p, get in
early before everyone starts talking of this technology. I have bought
£65 a tick (£65 per penny) of the Mar '06 future at 209p, which is
equivalent to £13,585 worth of stock (£65 * 209). Will probably increase
this over coming weeks, will keep you posted!

GM stock...get long at the bottom...

Also on Friday I picked up some GM stock, bought some Jun '06 futures at
$22.92 in £4 a tick. The whole world is too bearish on this company, I
really think they manage to reform themselves over the coming years and
manage to avoid bankruptcy.

They still have great technology, a great brand name in the US,
significant (albeit falling) market share, and once they sell a majority
stake in GMAC, not only will they get a huge cash injection, but GMAC
will be even more profitable if it can borrow in the capital markets at
much lower yields than at the moment (GMAC bonds trade ~4.50% over
LIBOR, if a bank took a majority stake in them, they could probably
borrow money below 1.00% over LIBOR...that is an ENORMOUS saving on the
amount the borrow/lend).

With the market cap of the company ~$12bn, this looks a bargain. This
will be one of those stocks that in 3 years time when it has tripled,
everyone will be saying how obvious a trade it was. Kirk Kerkorian has
been involved in turnaround stories before, don't be surprised if he
does it again. I will probably be adding to this position shortly.

UK interest rates...not going up any time soon, buy Short Sterling.

Lets look at UK interest rates (see previous blog yesterday for
discussion on the currency):

1. The Bank of England has been voting 8-1 for a cut in rates
2. The consumer slowdown is in force, thanks to a borrowing binge that
has left most of the country in debt
3. House price inflation has ground to a halt, so people that felt they
were getting richer over the last few years as their main asset rocketed
in value may start to feel poorer
4. Government spending has been out of control, and the Chancellor is
finally starting to realise it. Public sector spending helped the boom
over the last few years, now it will bring on the contraction.

So it seems rates are not going up, how best to play this? With 10y
Gilts yielding just 4.15%-4.20%, buying long bonds does not seem to be
an obvious trade (especially when long bonds in £ seem to be in the
midst of a bubble...I won't even BEGIN to tell you what I think of the
market lending money to the UK Government for 50 years at just
3.70%...well, maybe I will another time...). A simpler and lower risk
trade looks to buy some short interest rate futures (Short Sterling, if
you don't know the lingo)...I bought some Dec '06 Short Sterling at
95.36 on Friday in £25 a point. At 95.36, that is saying that 3m rates
in December this year will be 4.64% (100.00 - 95.36), but it seems to me
there is a good chance of a rate-cutting cycle starting this year, so
with the BoE at 4.50% this looks a low-risk/high-upside trade. I'll be
watching it over the coming weeks with a view to taking it up to £100 a
point.

FX...cable (GBP vs USD) is set to enter a massive bear market...

Welcome to my blog...this will hopefully be the first of many. Have been
selling some Sterling against Dollars over the last few days, with the
FED set to go to 4.50% this coming week and probably going to continue
raising rates, it seems an obvious trade to sell £ against it, where you
have the Bank of England (BoE) at 4.50% also but going nowhere, and if
anything looking like the next cut will be down, as one of the nine BoE
members has already voted to cut rates.

Lets face it, currencies are driven SIGNIFICANTLY by interest rate
differentials, and the $ is going to pass sterling in having higher
rates...check out a chart of the rate difference over the last 20 years,
versus the exchange rate...looks to me like £ is headed for a collapse,
and could easily be through 1.50 by the end of this year (the chart is
frightening!).

With our good ol' Chancellor Gordon Brown having well and truly turned
the country from capitilist to socialist in terms of its
spending/taxation profile over the last 9 years, the UK economy is only
going downhill. Get out of your £ now.

Sold throughout the last 2 days, at an average of 1.7792 at £13 a tick
(ie. if it moves from 1.7792 to 1.7791 i make £13, if it moves all the
way down to 1.7000 i make £10,296). Also sold a call option expiry on
Friday Feb 3rd, strike 1.7900 for 43.3 points at £5 a point (so £216.50
if it expires worthless). All these levels are the Mar '06 future. Come on the $!

For those of you not familiar with spread-betting, it is an awesome tax
efficient way to play the markets...I use IG Index, but there is also a
few others out there (City Index/Cantor). You can trade ANYTHING from
Bonds/Rates/Equities/Equity
Indices/FX/Options/Gold/Oil/UK/US/Europe/Asia.....get involved!