April 5, 2010

 Treasury Bonds are a Major Buy

I have been trading Treasury Bond futures for almost 30 years. As I have pointed out many times, I consider the Bond market to be THE Contrary Opinion market, that is, THE market in which you frequently have the masses all convinced the market is no-doubt-whatsoever going one way…precisely when it is going to do the opposite…and I HAVE NEVER, EVER SEEN THE BEARISH BANDWAGON IN BONDS AS FULL AS IT IS NOW…NOT EVEN CLOSE. Unless you’ve just returned from Mars, you are certainly aware that seemingly every talking head on the planet is absolutely, totally, no brainer, dead certain that long term interest rates are headed higher…and Treasury Bond prices are therefore headed lower. NO QUESTION!

Easily the number one “reason” they ALL, IN UNISON, cite is: “The economy is improving. Rates HAVE to go up.” This is NOT true. Without going into detail, I’ll just say the economy, with bumps along the way, has basically been improving (big time) for the past 30 years…and rates have been steadily dropping during those same 30 years…And I have heard that same erroneous “economy getting better, rates gotta go up” logic every step of the way.

And again, I HAVE NEVER SEEN ALL THE ANALYSTS AND “EXPERTS” SO CONVINCED, AND IN ESSENCE, SO CERTAIN THERE IS “EASY MONEY” TO BE MADE SHORT THE BOND MARKET…

So for one, I would remind you that any time it looks like “easy money”, it is most likely a loser…And two, if you don’t by now understand that when Wall Street is unanimously…lock, stock and barrel…telling you what is going to happen in a particular market, you have learned nothing from the various financial debacles of the past 8-10 years.

No, there are no absolutes in this stuff, and no, I am, myself, by no means always right about the markets, but more often than not, making money as a trader does mean being a buyer when NOBODY out there is doing it…It does mean being a buyer when 100% of the media “logic” would argue you are a fool (like buying stocks in March, 2009 for example)…We’ve all seen it over and over and over, when we’ve recognized that opinion was just so stupidly one sided that it MUST mean you should do the opposite, but even so, every time you are faced with that same situation, you find it almost psychologically impossible to pull the trigger and go the other way…It’s like, “How in the hell could this be a buy when EVERYBODY, and I mean EVERYBODY that supposedly knows anything about this is so dead sure it’s a sale.”…But that’s what it takes.

As just a FEW examples of how overwhelming is this bearish “groupthink” on Treasury Bonds, here are some quotes I picked up from the handful of media sites I scan, just in the last few days. I count 12 different guys here, and they are ALL saying the same thing….and they are ALL sure they are right…

3/25/10, “Bonds have seen their best days.” Bill Gross

3/29/10  “The rally in Treasuries is over.” James Caron

4/1/10 “Our research suggests that we are in the early stages of a long term bear market for Treasuries, especially for the long end.” Alan Bush

3/30/10 “Could this be the start of the ‘Great Bear Market in Bonds’?” Jeff Cox

3/30/10 “The bond market is a bubble. It’s getting ready to burst.” Bob Froelich 

3/31/10 “Yields are headed higher over the next year or two, with the 30 year yield (now at 4.75%) very likely hitting the 6% level”, Dan Siever

3/31/10 “Bearish on bonds: Why bond yields may be headed much higher”. Mark Hulbert

3/31/10 “Ten-year Treasury rates (currently 3.87%) will climb…to about 6.25% in coming years.” Dan Fuss

4/1/10 “Bonds and Utilities at risk…”, “investors should prepare their strategies for coping with a rising interest rate environment”. Michael Kahn

4/1/10“Announced the confirmation of a major trend: the breakdown of the bond market”, “the great post-1980 bond bull market has finally reversed.” Aden Sisters

4/1/10 “Investors are preparing for bond yields to head higher and the end of the massive bond rally in the past year.” David Callaway

4/1/10 “Our experts give you a dozen great ways to defend yourself from—or profit from—rising interest rates. And they may rise sooner than you think.” Marketwatch

Again, this is just a small sampling of what all the “suits” almost unanimously are saying…and if absolutely ALL of these guys (and ALL of their cohorts) are so dead certain, who could possibly be left on the sell side of this market? Again, it’s like stocks  a year ago…You DO reach the point where anyone who would sell, HAS sold, and it’s then time for the market to go  back up.

Believe me, I don’t sit here and just say “Buy Bonds” because I am trying to be a contrarian. There are always two sides to every market (bullish factors and bearish factors) but with this whole investing game often being based in mob psychology and media hysteria more than anything else, it is almost inevitable that at market turns you generally only hear one side of the argument…You must know what I mean…So here are a few (lucky 13) solid reasons why I believe Treasuries are going up, not down, and I assure you, none of this is “contrived logic”…but this you can decide for yourself. I copied most of them from one of my earlier newsletters, and expanded my comments on a few, so you may have seen some of this before… 

1.      For at least the next few years, inflation will be nil. All the talk about coming “hyper-inflation” is just talk. The money pumped into the system by the Fed has essentially been disappearing…and without their pumping, I believe we WOULD be in a Depression. With zero inflation, Bond yields should easily drop to 3%.

2.      Worldwide, Baby Boomers, who bought stocks for several decades, are now (and will be) buying fixed income instead. And they don’t, and won’t, care what the yield is. They want their savings to be secure more than anything else…and this mindset is NOT going to change for them…They are NOT going to get more risk oriented as they now become “elderly”.
 

3.      Globally, there are  billions of dollars, every day that HAVE to buy fixed income…that day...And the fear of, “Nobody will buy our Bonds”, is a joke. Again, worldwide, there are pension funds, mutual funds, insurance companies, banks (private and sovereign), and government institutions that all HAVE to invest in safe long term paper, again EVERY day (they can’t for example, say, “I don’t like the bond market here. I think I’ll get some Google stock instead”).
 

4.      China is NOT going to be dumping our Treasury paper…And they will continue to buy it…Russian, South African, Brazilian, etc. Bonds are not really a major/primary option for them. There is a reason (risk) why Brazilian 10 Year Bonds pay almost 13% as compared to our 10 year which pays about 4%.
 

5.      Believe the Fed. Short rates are not going up anytime soon…And the spread between short term (.25%) and long term rates (4.8%) will collapse as long term rates decline precipitously.
 

6.      The Dollar has bottomed. Internationally, there is “smart money” that understands anything bought in dollars is being bought at a discount. US Gov’t paper is attractive. And aside from this, remember how loudly and unanimously bearish on the Dollar that Wall Street has been for the last few years? And how the Dollar went straight up in their faces? I see the Treasury Bond market as being an almost identical situation right now.
 

7.      The US Dollar is NOT going to be replaced as the world’s “reserve currency”.
 

8.      US Treasury Securities are still UNQUESTIONABLY regarded as the safest paper on the planet. We also have UNQUESTIONABLY the most liquid debt market there is. This is one of the reasons why EVERY auction of US Securities is over subscribed…There is a constant, unwavering bid for our paper.
 

9.      Nobody who actually owns Treasuries wants to sell them. My mother, for example, has some Treasuries that are paying 6.75% and will do so for another 15 years. Why in the hell would she want to sell them? And do what with the money? If you personally do any investing in bonds, you must understand this. When you buy bonds, of any sort, you are buying them to HOLD them, and are not thinking, “When will I be able to sell this for a profit?”
 

10.  Right now, the demand for money (borrowing) is just about “zip”. This is anecdotal, but one of my clients “fixes” small banks that are in trouble. The institution with which he is currently working has three branches in three southeastern cities. In January and February, they made roughly $6,000,000 in loans. In March, they had ZERO applications. Borrowing can be seasonal, and this is just one bank in the USA, but this is a smart guy who has been in the banking business forever and he makes the point they are definitely not the only banks seeing this happen…I would also add, after having seen Treasuries make a major Spring low in what seems like 9 out of every 10 years during my career, I did long ago decide that the bulk of actual borrowing comes through the bank doors early in each year (generally)…and then dries up. Simply stated, no demand for money generally leads to lower interest rates.

11.  We have probably reached the apex of government borrowing…and still, in spite of all the supply that HAS come on the market…long term rates are still lower than they were for 90% of the last decade (and the “Go Go” decade before). Do you realize how expensive those 7 years of full blown Iraqi war were? And that our fiscal involvement there is steadily declining now? And that our involvement in Afghanistan IS going to be limited? The point is, the deficit skyrocketed long before the bailouts started here…And before too long, the costs associated with Iraq, Afghanistan and the Bailouts will all be in the rear view. The need for US Government borrowing WILL turn sharply lower…In other words, all the debt the US is issuing that is supposedly (but hasn’t) going to push rates higher will be diminishing in volume (this IS a big deal).
 

12.  The experts are also all crowing that the with the government no longer, as of March 31, buying (supporting) Mortgages from Fannie Mae and Freddie Mac, mortgage rates almost certainly are going to go screaming higher. What none of these people seem to consider is that any mortgage being made today is probably more rock solid than Stone Mountain itself, and I am sure there are tons of yield seeking institutions who do understand that owning TODAY’S mortgage paper, whether passively or as servicers, is an excellent place to invest their capital…and there will be NO collapse in the mortgage market, and consequently, NO spike up in mortgage rates…
 

13.  You must never forget that overwhelmingly one sided opinion can dramatically change the supply-demand equation in any market…and I firmly believe the interest rate market is much more the Rule than the Exception in this regard. When 99% of the rhetoric, for months, has been “Rates are going higher!!!” (even though they’ve only gone sideways), all the people who do have to borrow DO go out there and do it. I mean, if you know you need to borrow, and you “know” (from what everybody is screaming) that the longer you wait the more it will cost you (in interest), who in the hell, whether the borrower is a private individual or a corporation, is going to wait around to go get that loan? The point is, like that bank going from $6 million to zero in loans, borrowers do actually go running en masse to the banks to beat the supposedly higher rates they’ll pay later, which after they’ve done so, does actually result in lenders with no one to lend to (at current rates), and the next step in the cycle that I have observed for years, is lenders then do end up LOWERING their rates to attract borrowers…and I assure you, this is real world sort of stuff. In the final analysis, banks are primarily in business to make their money as lenders, they are currently paying almost nothing to borrow themselves, and rates DO have plenty of room to come down, and probably WILL.
 

I’ve been far too longwinded with this but I know I can’t just sit here and say, “Buy Bonds! Nobody else is.” And I do believe that none of what I’ve written is just market BS…and that these ARE all extremely valid reasons to be expecting, in the face of all the bearish “expertise” arguing otherwise, a MAJOR bull move in bond prices and a MAJOR (further) decline in long term interest rates.

TREASURY BONDS ARE CURRENTLY IN THE 115 AREA. I THINK THEY WILL PROBABLY TRADE TO 130 (15K per futures contract)BEFORE THE END OF 2010.

I AM CURRENTLY BUYING CALLS, BUYING FUTURES, AND EVEN WRITING PUTS IN THE JUNE AND SEPTEMBER CONTRACTS.

Here’s the big picture…


Here is, I believe, a TON of leverage…

I don’t just pull these predictions for 10-15 point rallies out of a hat…Just as evidence here are a bunch of bullish bond moves that have taken place since 2000…and remember that every one point move in the bond market is $1000 per futures contract…

It’s a buy guys. Inflation ain’t coming. And the world ain’t going to stop buying bonds, ESPECIALLY ours. And I do promise you that opinion right now is exactly like it was dead in front of (and during) every one of those bull markets you see here…Only this time it is louder and more pervasive than I have ever seen it…And to all these “dicks” (sorry), being short bonds is nothing less than a layup…a can’t miss…So, I’d ask you, how many times in YOUR trading life have you ever seen anything about this stuff be as easy as they seem to think it is?

Buy Treasury Bonds. I think they are a massive bull trade.

And here are a few other charts…

Here is a quite recent classic futures collapse which I think directly relates to the Soybean Oil market…

Finally, here’s another extra little piece of information…The statistics below outline the growing popularity of commodity funds…As I’ve said before, how many times do you have to see Wall Street come up with hot products, that eventually end up screwing everybody that goes near them (like CDO’s for one), to understand that whatever New York is selling is probably an investment you want to avoid?…Back in the 1980’s, AFTER commodities had topped out, I remember all the brokerages came up with “Natural Resources Funds” which were also supposed to capitalize on the bull market in commodities (and inflation) but, as you might expect, they were all “after the fact” and generally went nowhere to lower for years. Now they call them Commodity ETF’s and I think the story will end just as badly for anyone who invests in them….Anyway, here are the stats…One old commodity market adage is, “Popular ideas tend to lose money”, and the numbers that follow here sure make it look like hoards of investors are buying into this one…

These are excerpts from my newswires last week….

“While there's much talk about investors staying away from stock mutual funds during the bull market, one sector has been seeing net inflows and racking up assets all along.”

“Commodities funds…from the beginning of March 2009 through February…swallowed two-thirds of all new money heading into sector stock funds, and more than a quarter of net inflows for all stock funds…Commodities funds account for just 8% of all sector funds.”

“In those 12 months, the funds have seen total net inflow of $12.2 billion. The only other sector category that saw more than $1 billion in net inflows was gold-oriented funds.”

“Total net inflows into all stock funds for the period were $44 billion.”

“The inflows represent 23% of total assets among the 144 commodities funds -- a big uptick for a relatively small slice of the market.”

Sounds like Wall Street poison to me…And all those people are basically betting on the “inevitable inflation that is coming”, which, as I’ve said before, I believe is exactly backwards.

BUY BONDS. SELL SOYBEANS.

Thanks,

Bill Rhyne
866-578-1001
770-425-7241