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No. of Recommendations: 6
"...Or perhaps traders are just confused?"

Stas,

It's useful to think about 'markets' as being made up of four groups: the 'fast' money, the 'smart' money, the 'big' money, and the 'dumb' money. The four enter/exit sequentially. The 'fast' money are the professional traders. They're constantly probing, constantly trying to exploit fleeting pricing anomalies. When wrong, they'll reverse on a dime. They used to be humans. Today, increasingly, they're 'algos'. Tough to compete against, but not impossible.

The 'smart' money is the 'early' money. They've done their homework. They'll spot trends before anyone else and get in modestly, typically adding when they are proven correct.

Once it becomes obvious that a trend is underway, the big money --the institutionals-- pile in big time, and the media begin reporting what is already obvious to those who engage markets, rather than just talk about them from the sidelines. When their yammering reaches the uninformed, they pile also, buying the top from the smart money who now is exiting and looking for the next opportunity.

So, with respect to Ferrellgas, who's pricing those bonds, i.e., who is your counter-party to the trade? and which of you is correct? If you're going to mess with spec-grade debt --and I've bought a lot of it over the years-- you've gotta be right more often than not if you're making equal-sized bets, or you've gotta be right about the big stuff.

Personally --and this is just me, though Linda Raschke, one of the world's best traders, argues the same. It's all but impossible to know which trades will work and which won't. So size positions in such a way that even a series of losing ones won't get you thrown out of the game. (Talib explains this strategy fuller in his books.)

Why do yield-curves invert? Because traders are beginning to price the bonds according to their estimated workout value, not their value if held to maturity in whatever interest-rate and inflation-rate environment is expected to prevail. In the case of Ferrellgas, are they right? Who knows? So do your due-diligence and size a position properly, which might mean 2 bonds, 5 bonds, or 10 according to your account size, or none at all. Then its "wash, rinse, repeat" as you dig into the next opportunity.

Arindam
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