The jobs report this morning, April 2, was pleasantly neutral (not too hot and not too cold, but just right) Everyone agreed that the report showed the economy is making progress and the stimulus is working. The markets showed that at the open (bond and futures). There is really nothing to stop the market from moving up another 10%, now. But further out, there is a debate. Today that debate was led between Robert Barbera and Mohammed El-Erian.

Of course, El-Erian was pumping the "New Normal" paradigm of PIMCO. Barbera was maintaining his "Old Normal" posture, for which he has been an outlier the last year (there are a couple others like Mike Darda and Jim Paulsen, our local MN boy). The New Normal states that we are stuck in a stagnant recovery like in the 1930s with high unemployment and low economic growth. PIMCO has been whoring this idea for the past year. PIMCO led by Bill Gross, really thinks they have ALL the answers and everyone else is just wrong. But we have caught Bill Gross being wrong on interest rates in the past. No reason to think they are right this time.

Meantime, Barbera, like Paulsen, has been calling for 4-5% GNP growth this year (same as my call, by the way), with enough momentum to achieve "escape velocity". This is another way of saying the economy will not stagnate near no-growth, but will get back on to a normal cyclical track.

I agree with Barbera and my investing posture shows that. I believe we will get back on a positive economic track and for a lot of good reasons. I have maintained the only thing that can screw up the economy is the government making the wrong moves. But for demographic reasons, I think the Feds will be forced to make the right moves, even against the will of Obama.

Obama is an ideologue. He doesn't seem to care much what happens to the economy so long as he can socialize the country. He wants to "lift up the poor" on the backs of the rich. Unfortunately for him, that is NOT what most Americans want. They didn't want more of the Bush Jr. regime. They did want "change", whatever that means. Now they have found they are getting way too much change. The Dems will lose power in November and that will allow our economy to get back to the "Old Normal".

This is my take and for this reason, I am staying long.

Here is one we can work for a long time, I think.

TBT, which is a blend of Treasuries that produce a 20 year maturity, moves higher with interest rates. It is the "ultra short" version of the bond price, but seems to be a good proxy for 10 times the interest rate. Today it is at 48.50, which is almost exactly 10 times the 4.8% interest rate of a 20 year bond. It was 70 in early 2008 (when it was created) which was similar to 10x the interest rate for a 20 year note at that time. It is not really pegged to that rate, but should move proportionately.

I think we can all agree that interest rates move higher from here. So, I suggest buying the 38 June call and selling the 58 June call. This gives a 20% upside between now and June on a $9.70 investment, which means a better than 100% return if interest rates move over 5% by that time. I just got done discussing using a put to protect the downside, creating a collar, but there is no point in this case. The price never got below 38 in the crisis and it is hard to see lower interest rates than what we just had....forever.

I like using options for any of the "Ultra" or amplified short ETFs because they all use Swaps and the futures market to build their positions. Trading costs and other futures market ineffiiciencies cause the price of such ETFs to deteriorate over time. Using options forces a repricing of the underlying as the traded options expire. This manages (does not eliminate) the problem with short ETFs.

Here are the tickers:

Buy June 38 TBTFL Call for 11.00
Sell June 58 TVTFF Call for 1.30

Net Cost = $9.70 / contract

I think we will be able to keep this trade on, rolling forward and upward, for the next 2-3 years as interest rates climb back into "normal" territory with the 20 year maturity average getting back to 7%. If inflation explodes because the Fed screws up, this is an even better trade and those levels, and beyond, come much faster.

Successful investing is all about a contrarian perspective. It is my personal challenge to stay contrary at all times. I am naturally that way, so it is somewhat easy for me. Still, there are times, like June or October 2007, when my contrary warning bells were going off, but I did not listen and I stayed long, much too long.

But just as too much positive talk should trigger a contrary response leading to the action of "Sell", so too the same is true when there is too much negative sentiment, like right now. I actually allowed myself to be talked into this negativity in late July, much to my personal detriment. I went short the market in some of my accounts, and sold stock and funds in others, with the market at SP500 = 950. I was worried about all the things I should have ignored: approach of 1000 on the SP index, approach of traditional scary September-October time period, talk of a double dip recession, talk of healthcare and all that it would do to the economy, etc.

But now, I have my head back on straight and I am long the markets and am rejoicing in negative talk. For example, today the Chicago Purchasing Managers Index (PMI) report was released. It fell to 46.1 from 50.0 the previous month. It was expected to be at 52.0. Anything below 50 indicates negative purchasing sentiment.

At the same time, the ADP private payroll forecast was weaker than had been expected by market participants and so the stock markets sold off. On the surface, this is bad news and reinforces the "double dip" recession, or "W" stock market talk. It should be a very bearish signal, right?

No. Wrong. In the economy and markets, quite often, what's down is up and what is up is down. It is a bit of "Alice In Wonderland". The reason that bad PMI and unemployment data are good? It is that it gives the Fed and Treasury the cover to continue with aggressive monetary and interest rate policy to get the economy back on track. As soon as the economic data turns stronger than Fed forecast will be the day the markets turn down.  The Fed and Treasury will start applying the brakes by raising interest rates and tightening money supply.

Stronger economic data means higher interest rates. Higher interest rates mean an eventually weaker equity environment for no other reason than alternate investments yielding interest rate returns begin to look more attractive and shift some demand away from stock equities.

The sweet spot in any market recovery is when the economy bottoms but before it heats up enough to force higher interest rates to counter inflation. We are right now at the point of optimal return and have been since March. I am staying long until the Fed starts raising rates, probably not till after the middle of 2010.

Here is a video clip on the ADP report:

James Grant penned a commentary in the weekend edition of the Wall Street Journal (September 19, 2009).  James is always worth reading (Grant's Interest Rate Observer).  He has been a moderately bearish commentator for as long as I have been reading his work (10 years), most often in Barron's articles.  He has bemoaned the high consumer and national debt and the very low (even negative) personal savings rate in America.  For this, he has called for a weak dollar and higher interest rates for the past decade.

That he flys in the face of his brethren bears is of no small consequence to me.  Normally James Grant's perspective is closely aligned with so-called other "bond vigilantes" like Bill Gross at PIMCO and perma-bears like Bill Fleckenstein or Peter Schiff.  Those other dollar sellers / interest rate watchers are still looking for a flat to declining economy and dollar and moribund economy.  Grant really is making a departure from his club here, which is good because it is contrary.

He was early to call the stock market decline, as far back as 2005.  But this is news: now he sees it is time to become Bullish, if for the all the wrong reasons in his view.  James Grant is leaving the Bear camp (maybe six months late).   Here is an excerpt from his article.  Click here to read the entire piece from the WSJ.

Though we can't see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter.

The Great Recession destroyed confidence as much as it did jobs and wealth. Here was a slump out of central casting. From the peak, inflation-adjusted gross domestic product has fallen by 3.9%. The meek and mild downturns of 1990-91 and 2001 (each, coincidentally, just eight months long, hardly worth the bother), brought losses to the real GDP of just 1.4% and 0.3%, respectively. The recession that sunk its hooks into the U.S. economy in the fourth quarter of 2007 has set unwanted records in such vital statistical categories as manufacturing and trade inventories (the steepest decline since 1949), capacity utilization (lowest since at least 1967) and industrial production (sharpest fall since 1946)......

.....By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. "Reflexivity" is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today's bull markets are helping to revive it.

I promised to be bullish , and I am (for once)—bullish on the prospects for unscripted strength in business activity. So, too, is the Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute's long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 —after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion. Which is not to say, he cautions, that growth this time will match that pace, only that growth is likely to surprise by its strength, not weakness.

And that is my case, too. The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects. Pigou had humanity's number. The "error of pessimism" is born the size of a full-grown man—the size of the average adult economist, for example.