JR Snell Capital Management, LLC

A couple of words about bonds here… and a little bit of a warning as the media-hype machine touts the past success of bonds.

(Hint: Although the monkey thought it was all in good sport, we all know what happened to the weasel next.)

My long-running pseudo-battle with Bill Gross and the Bond Sellers came to an end this fall when we exited our long-term Treasury positions. I still do not like long-term bonds as an investment vehicle right now. The simple reason is that the price is too high.

The price of the long bond (20+ year Treasury) ETF (TLT) is being held up at weirdly astronomical levels by investors who can’t think of any safer place to put their money. The troubles in Europe have driven investors around the globe out of the Euro and European country’s sovereign debt and into the dollar and US debt.

Remember this: People are not buying US debt because it’s “all that”… it’s not, and it’s providing a lousy rate of return… but, hey… we can print our own money and the Europeans can’t, so Treasuries seem to make a pretty decent “mattress” for global investors to stuff their cash into at the moment.

I have my ears to the track and I’m hearing that money has been coming out of stock mutual funds at another record pace here recently. And where is that money going?

U.S. stock mutual funds that invest in domestic equities had their second-biggest redemptions last year as record market swings sent investors to the perceived safety of bond funds.

And why do we suppose it’s going in to bond funds?

Despite a reputation for being a slow-growing alternative to stocks for the risk-averse, bonds just passed stocks’ long-term performance over the past 30 years.

Many investors chase last year’s winners, perennially dooming them to under-performance… not to mention it makes you feel like you’re always in the wrong place at the wrong time… very hard on the ego. It’s kind of like charging into real estate in 2006: It seemed like a good idea at the time.

In fact, you are actually witnessing an historical event: A bond bubble that offers the most expensive bond market in your lifetime. Don’t bite… The minute Europe straightens out their situation, the bond market bubble will pop.

Here is a very wise investment technique (good for all fields at all times): Take the time to figure out precisely what everybody else is doing… and then do the opposite.

ACTION ITEM: If you have bond investments, reduce or eliminate your allocation to them.

Bill Gross, Bond fund, Bond market, Exchange-traded fund, interest rates, investing strategies, Investor, Mutual fund, treasuries, treasury, United States, United States public debt, United States Treasury security, William H. Gross

Image by UGArdener via Flickr

Bill Gross doesn’t even know me. I’m a bug on the windshield of the Mack truck that PIMCO is. Except that I haven’t been squished… somehow I sneaked in the driver’s side window and I’m flying around the cab. For now.

I was implying (and actually acting on my implications) that we are poised for a rally in US Treasury debt. You can cruise some of my past posts about it here and here. At just about the same time that I was expressing my conviction that we were bound for a bounce off of the Treasury bond lows (February-ish), the biggest bond manager in all of the world announces that the treasury bond market rally is OVER… not just over-over, but really OVER! Done and done, no more rallies ever.

Don’t believe it.

So what’s happened since then? Here are a few recent headlines that pretty much tell the story without my usually indelicate prose…

Related articles

• Pimco Adjusts Holdings to Show Gross’s Fund Owns U.S. Debt (businessweek.com)
• Gross Buys Treasurys But Remains Bearish (online.wsj.com)
• Bill Gross Tiptoes Back Into Treasurys – Still Short, Though (blogs.wsj.com)
• Bill Gross Is In A Hole, And Now He’s Digging Like Crazy (businessinsider.com)
• Investors love U.S. Treasury bonds despite debt worries (usatoday.com)
• “PIMCO head Bill Gross tells investors to stay away from Treasury bonds” and related posts (thenewspundit.com)
• Pimco’s Long-Short-Long Position in U.S. Debt (paul.kedrosky.com)

and…

Gross Says ‘No Regrets’ Over Missing Short-Term Treasury Rally

and this quote from Joe Weisenthal of the Business Insider…

The “bond god” — who has been one of the worst performing managers this year thanks to his bearish view on Treasuries — is now sounding like Marc Faber or some other doomsayer, warning that the US is in worse shape than Greece.

I think that the one mistake he is making is that his bet is out sized for reasonable asset management strategies AND it is totally out of character even for him (OK, that’s two, sorry). It makes me question whether he’s gone all “Charlie Sheen” on us.

I’m humble enough to admit that Bill might very well be right… eventually. Whether he’s still managing anyone’s money at that point is a different question entirely.

It doesn’t matter though, I plan that we will be long gone from the Treasury market and onto the next opportunity well before Bill is ever right.

(Disclosure… my clients, the firm and myself own positions in US Treasuries (TLT))

Bill Gross, buy and hope, Charlie Sheen, interest rates, investing strategies, Pimco, timing, treasuries, treasury, United States Treasury security

In my last couple of posts about what I believe to be a profitable opportunity in Treasury bonds (while everyone else has been declaring the death of the Treasury bond market), I’ve come off as a bit of a “contrarian”.

It isn’t my typical “modus operandi” to be a contrarian just for the sake of being contrary as an investment strategy. I really am a believer that the specter of inflation isn’t as certain as “experts” would have us believe. I explain a couple of my thoughts behind my thoughts here and here.

It makes it all the more exciting that a viewpoint that I feel strongly about happens to run counter to “conventional wisdom” (which is an oxymoron) AND I can see a trade-able opportunity develop AND it is so easily demonstrable to my readers.

So, here it is… the Treasury market is up pretty big today and it was up pretty good yesterday as well. OK, so what’s the news? The news is that the manager (Bill Gross) of the biggest bond fund in the WORLD (PIMCO) announced that he had DUMPED every single Treasury bond in the portfolio last month and he urges investors (in general) to do likewise. Buried in his statement is this little gem also…

Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Why the rally then? Here is where you get to exercise your yin-yang muscle:

• THE biggest US holder of US Treasuries is no longer a seller.
• He also cannot be a seller in the near future (remember, he now owns none)
• The biggest bond fund in the world has now further stated that they would likely be buyers of Treasuries in the future if prices deteriorated further. This supports prices against further declines… removing much of the risk from the trade.
• Therefore, the supply-demand equation moves favorably to one of more potential demand than supply.

Not to mention the fact that Bill Gross is not going to do “telegraph” his strategy before the fact. If you’re thinking of selling your Treasury bonds now, forgetaboutit… you missed it.

deflation, interest rates, investing strategies, Market Comments, timing, treasuries, treasury

When I sit down with clients (or clients to be) we talk about “bubbles” at some point in our series of conversations. I usually recommend a book called “Extraordinary Popular Delusions and the Madness of Crowds”.

It’s a tough read for a couple of reasons… it’s very thick (over 700 pages) and it’s written in the style that folks used back in 1841. For me, it takes a lot of concentration to read and comprehend just because the style is so foreign to our contemporary way.

Nonetheless, it’s an important book and details a number of historical speculative bubbles. By recommending and discussing the book for clients, I am leaving a couple of messages… First, it’s human nature and second, it’s nothing new.

The NY Times has now recently published an article that demonstrates that there is a chemical reaction that occurs in our brains that makes us “feel good” when prices are running up speculatively.

But according to the article, while dopamine is flowing freely and generously for most of the run-up, the dopamine STOPS firing as we hit the more “bubble” phase of the run-up (the last phase).

The chemical changes might be that “little voice” or a general feeling of uneasiness about overall conditions. But, because of what’s called the “Country Club Effect”, nearly everyone ignores “the little voice” much to their later chagrin.

Many times successful investing seems to be having the ability to heed the warnings of that “little voice” instead of allowing your rational mind to convince you otherwise.

Now it seems that there’s a rational explanation for why the smart decision sometimes appears to be the irrational decision. Hmmm, interesting.

interest rates, investing strategies, Market Comments, market timing, s&p 500, treasuries, treasury

For months and months (or maybe even a year) I’ve been banging on the table about how I expect that a decent portion of account returns for 2010 might just come from long-term (20+ years) government bonds.

I anticipate that US Treasury securities will continue to be our baseline method providing the ability to persevere for the next who-knows-how-long.

and…

I would expect that between positioning in and out of Treasuries as appropriate and positioning in and out of equities as appropriate, our clients will continue to persevere… and quite possibly prosper.

You can read these quotes in context here. You can also review some of my other musings about the long US Treasury Bond “opportunity” here and here.

This is how we felt about long-term treasuries last year at Thanksgiving, from our post called, “Picking at Your Turkey”:

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

We are in line with mainstream thought in that we believe that bonds as an asset class (and specifically long-term government bonds) might be a good thing to have in your portfolio at most times. However, we depart from the mainstream because we do not statically allocate a portion of a clients’ portfolio to bonds and then hang on for hell or high water. Radically, we believe that there might be times when it is not a good time to make new purchases of the “long bond”.

And in a further logical departure from current financial dogma, we believe that there are even a few times where it’s in our best interest to actually sell them out of our accounts completely.

NOW WOULD BE ONE OF THOSE TIMES.

buy and hope, interest rates, investing strategies, Market Comments, market timing, timing, treasuries, treasury

Looking back over the last couple of months worth of posts, I’m thinking that it might appear that I’m a little opaque as to what areas of what markets you should be focusing on.

I’m not, so I’ll clear things up before I go AWOL for the week. First, understand that anything can happen over the short-term. What we always work on here in our laboratory is more macro-type thoughts for overall “big picture” positioning for ourselves and our clients. That’s what this is about.

[Sidebar... I think I might have mentioned that we are all about the "return of thought" when managing investments... That is, come up with a prospective course that we believe things will take and position for it. A little more active than reactive, and certainly not passive.]

If there’s no magic bullet or secret formula to this investing thing, the elephant in the room says that those investors who wish to survive (and thrive) in tomorrow’s markets might have to think for themselves (gasp)… or (at the very least) think for themselves enough to know they should hire those people who think for themselves.  – From “How We’re Fixing It”

First, the average inflation rate for the last 100 years or so is about 3.0%. The TIPS market (Treasury Inflation-Protected Securities) is showing the breakeven inflation rate at 1.9%… significantly lower than the 3.0% average. Translation: The market says that economic stimulus and other Fed stimulators (very low interest rates) will not work as planned… Translation: Extended period of very slow or non-growth. Translation: Buy TIPS because the treasury structured them to provide downside protection against deflation (which, of course the Feds assumed would never happen)… and this is really one of the very, very few investments that I can think of that offers this.

We’ve been buying the individual bonds for clients and mixing it up between 7 and 14 year maturities. If you can’t buy the individual things, you can consider the ETF (TIP)… This ETF makes sense for smaller accounts, but they have some additional internal management fees which is why we shy away from them in larger accounts

Following this premise, it wouldn’t hurt to accumulate some longer treasuries… like in the 20 year (give or take 5) range. I hear people whining about only getting 4.20% on a 20 year treasury… but I think if a person accepts what might be the ”new normal”… 4.20% might not look that bad, in hindsight.

We’re not married to holding on to the things for 20 years though. If we were presented with some outsized gains on our treasuries over the next year or two, we wouldn’t be afraid to take the profits and find a new home for the proceeds.

Dividend-spewing, old-line, consumer staples stocks look tasty for a couple of long-term reasons. First, we can get between 3 and 4% on many of these stocks (i.e. HNZ) and their business model isn’t so sensitive to the economic cycle.

Don’t get me wrong… anything and everything will go in the tank if the economy falls off a cliff again (people will even go without ketchup if things get bad). But generally, if our extended-malaise scenario becomes fact, then these consumer staples companies will still be chugging along same as always.

Just be sure to do your homework and feel comfortable that the stocks you’re choosing have low debt and decent enough margins to keep coughing up the dividend if things stay marginal for a long time. Email us if you need some help in this area.

Technically, in the stock market we’re acting a little short-term “toppy”… meaning it’s not a good time to be going after your favorite growth stock. Long-term? At the moment, none of the classic, fundamental, long-term stock market indicators are suggesting that now is a good spot to become a new “buy-and-hold” type of investor. Sorry. Be patient.

The upside to the “new normal” is that we can afford to be patient in the stock market. These days, nothing is going to run away from us for very long. No matter what the economy does, we still believe in volatility. Since volatility is how we’ve always made our money in the stock market, we still believe that there is money to be made in stocks.

As far as the thoughts of chasing stocks for fear of being left behind? We’re content to let everyone else risk heartburn while we just pick at the turkey.

buy and hope, deflation, fed, interest rates, investing, investing strategies, investments, Market Comments, safety, strategy, timing, treasuries, treasury

Utility Stocks (as a group) have forsaken me this year by advancing only about one-fifth of the amount of the S&P 500… which can act as a real short-term boat anchor in your portfolio if you own any quantity at all. Yet, my passion for the sometimes stodgy “dividend machines” still burns hot.

Why?  First, there’s the cash flow.  My favorite utilities ETF, the Utilities Select Portfolio (XLU) is spinning off a 4.31% dividend yield in an environment where a half a percent is doin’ good on your money market. That’s worth taking a little bit of market risk.

Then there’s long term performance. The Dow Jones Utility Index has outperformed the S&P 500 by 4.4% PER YEAR over the last 10 years. This puts the DJUI in positive territory for the last 10 years, whereas the S&P 500 is down almost 20% for the same period. And we are supposed to be long term investors, right?

Then… What’s the problem? Why the dismal performance?

To answer the questions, I think we have to look at it in context of what utility stock underperformance might be saying about the economy in general. The last time we emerged from a recession, the utility averages advanced about 25% in the first year of the recovery (2003). This time, they have only advanced about 4%. My opinion is that there’s nothing wrong with utility stocks per se, but they might be telling us that there is still something wrong with the economy.

Mix this in with the failing dollar, gold hitting all-time price highs, and oil’s recent jump back to the $78 per barrel neighborhood and there’s plenty of evidence afoot to suggest that all is not “right” in the realm.

There are so many variables out there that even Helicopter Ben doesn’t have a real clue. Bernanke (at the moment) must be contented to just dump cash on the U.S. economy and hope for the best… while walking the tightrope.

We have the early indicators of inflation that gold, oil and utility stocks might be showing us on the one hand while we have the deflationary pressures that come with collapsing employment, a housing value slam with a possible double-dip and consumer spending that has all but evaporated.

So, I think utility stocks really ain’t misbehavin’… I think they’re trying to tell us something about the economy. And if I’m hearing them correctly, I think I’d rather lie with my lovable dogs (of late), than to be all loaded up on or still chasing after “recovery” stocks.

deflation, interest rates, investments, Market Comments, s&p 500, safety, strategy

OK… The world is not coming to an end already…. Yes, we have problems… Yes, they are serious… and yes, they will take years (probably many) to resolve.

We have some massive deleveraging as a country and as individuals to work through. Deleveraging is painful, whether you are a nation or a household. As we pay down debt (individually and collectively), those funds have to come from somewhere… Maybe they come from curtailing our spending, maybe we curtail our investing and saving.

If you can think about what you would do personally if you find yourself having to “de-lever”, then you know exactly what is happening with our economy. You know why spending has evaporated, why no one is buying cars, or houses, or Rolexes right now.

You see, it’s not just that credit has tightened up, it has. But, I think we have to recognize that the demand for credit has evaporated as well. It’s for this reason that I believe that simply making credit more available will not solve our problem… We all have to de-lever… pay off debt, pay down mortgages, get off the credit cards, etc.

It doesn’t matter whether you personally find yourself in the position where you must de-lever. If you don’t, your neighbor probably does and the country definitely does… and this is what matters: There’s A LOT of it that is going on.

The solution? Time. Time for Americans to do what they’ve always done: Get up in the morning, work hard and pay our bills. We will take the kids to school and soccer practice and buy a house or a car if we need it.

And we’ll do this all the while and over and over and over until the problem solves itself. It will solve itself because it will all be done with a new attitude, one of frugality and a new conciousness of the difference between a WANT and a NEED.

Maybe we can learn the lessons that our ancestors learned during the Great Depression without having to plumb the same depths of despair.

Frankly, what we don’t need right now is the excessive hand-wringing and scare-tactic speeches that our President has been making as a ploy to get his package passed. And we don’t need the media hype and horror stories thrown at us every single day. We get it… the economy sucks.

What we do need to do is to stop, take a deep breath, relax and to look around. Most Americans are working, have good jobs and are not in trouble with their mortgages. Most Americans are already doing what needs to be done to get us out of this thing. We’re a lot more resilient and creative than ‘they’ think we are!

bailout, bank failures, cash, credit crisis, interest rates, investing, investments, rescue, safety

Last night’s treasury auction demand was so high that investors bid the rate negative. There’s a solid rundown of the situation here.

According to Bloomberg, If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56. 

Deflation impacts everything

As if it wasn’t easy enough to lose money in the stock market, now you’re guaranteed to lose money in short-term treasuries! I’m not sure that this is what everyone has in mind when they talk about Treasuries being “guaranteed” investments.

For those worried about the possibility of deflation, this should be a little reality check… It’s heeere. The point at which people are willing to PAY money to lend it should be a sign that maybe a huge contingent of very smart folks think that cash will be worth more in the future than today.

Here’s other evidence…

• Stocks? Deflated… down 40% or so, depending on the day.
• Real Estate? Deflated… down 20%-40% depending on where you’re looking.
• Gold? Deflated… It’s an inflation hedge and it’s down 20% plus recently.
• Oil? Deflated… down around 70%
• Garbage? Deflated… Don’t laugh, it’s true. They’re calling it the “Trash Crash”!

The Trash Crash? Yes, mixed paper has dropped to $20 to $25 a ton from $105 in October, tin is down to $5 per ton from $327 a year ago, cardboard that sold for about $135 a ton in September is now going for $35 a ton, plastic bottles have fallen from 25 cents to 2 cents a pound, aluminum cans dropped nearly half to about 40 cents a pound, scrap metal tumbled from $525 a gross ton to about $10.

Ouch… throw in the fact that most larger US cities have recycling programs whose costs are offset by what they get for the recycled material, and you’ve got another municipal owie to deal with.

So, yeah… wake up… deflation’s here, now, already. Rather than fret about it, I’m going to focus my energy with my clients and on this blog putting forth and implementing strategies to deal with it and maybe profit from it. I’m interested in now trying to detect if we’re in for an extended period of deflation or and what signs will I need to see that shows us the trend is reversing?

For now, I’m thinking about selling off about $4 million in 3 month Treasuries that I bought for clients about 2 months ago. They’re selling very near face value a month before maturity. Who’d a thunk it?

deflation, fed, interest rates, treasuries, treasury