It is time to go long on Eurodollar futures contracts and short on stocks
Sam Adelton
Jul. 11, 2007

The stagflation that we were talking about for the last two years is finally showing its nasty teeth. Now after all this time the Wall Street gurus have finally started to doubt the Federal Reserves real capabilities in controlling inflation while maintaining real growth in the economy. The commodity and wage inflation (from Asia and other emerging economies) is high. But at the same time the economy is stagnating from mortgage and other debt related problems.

The Fed has finally realized the stagflation in the economy. The Fed Chairman in the last twenty years since 1987 crash for the time failed to pacify the market. The retail sales are slumping and input cost for corporations are rising. Unless productivity gains sharply, the corporate profit looking forward into three quarters will be sharply lower. As a result the stock market is vulnerable to fall sharply.

At the same time the longer end of the yield curve – the ten-year note and the thirty-year T bonds may not provide a safe haven because of the accelerating inflation. The safe haven is in Gold and short term notes.

It is time to own Eurodollar futures and at the same time short the stock futures. Of course, complex-hedging models with the help of options and other derivatives should protect against any adverse moves.

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