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))

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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

Our friends over at the Daily Capitalist have put together a concise article that explains what I believe will be a fundamentally lingering problem for years to come and is the centerpiece for my argument about why, we as investors should reset our expectations of investment returns going forward.

The unfortunate fact remains that credit for most of America is still tight, banks are still trying to repair their balance sheets, and the overlying problem is real estate, the detritus of the Fed’s reckless monetary policy. Credit expansion fueled by the Fed’s easy money policy of the early 2000′s drove private debt to fuel housing over-production, and drove commercial debt to fuel commercial real estate (CRE) over-production. It was the greatest such expansion of money and credit the world has ever seen and it went primarily into real estate. We are now facing the consequences of that expansion and boom: the bust.

You can read the article in its entirety here.

credit crisis, deflation, fed, real estate, treasury

We’ve had this running conversation about Treasury bonds for a little over a year now, as we suggested here in late November 2009 that you might want to get involved in Treasuries for a portion of your account.

We didn’t really broadcast our spring Treasury buying spree (we have to keep some things “client only”), but our clients saw it in their accounts… and this has been the last time (March – April 2010) that we did any serious accumulation of Treasury bonds in client accounts.

In my late August post, we suggested that if you are “following along” you might want to consider moving out of the longer-term treasuries.  We didn’t really offer up the mechanics of why we were suggesting this, we just offered up that we were liquidating Treasury positions in client accounts.

Although we’re not purposely contrarian in our investment style, our way of thinking typically puts us at odds with the mainstream. Apparently, many in the media are seeing an end to a multi-year bond run as of the past few weeks.

Bonds have been a major magnet for new money over the past two years – until last month. According to the Investment Company Institute (ICI), the weekly net new cash flow to the bond market eclipsed stocks for two years, until the two weeks ending November 23.

Click to enlarge

Paradoxically, to us it’s beginning to look interesting again!

I don’t know what the rest of the financial press has been looking at (maybe nothing?), but the chart to the left is what we’ve been watching for the past couple of years.

Just so you know where we’re coming from.

fed, investing strategies, Market Comments, market 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

Yesterday (11/19/09) on Capital Hill, Rep. Kevin Brady R-Texas got into a little a little “tiff” with Timothy Geithner (Treasury Secretary) during a Joint Economic Committee hearing.

It seems that Rep. Brady rankled Mr. Geithner a bit by insisting that he resign, blaming him for rising unemployment, growing federal deficits and accounting flaws in the number of stimulus jobs created, among other economic problems.

All of the articles that I’ve read about the exchange focused on how unusually forceful Mr. Geithner was and how hot the debate ended up getting. Included in most articles is this statement by Mr. Geithner:

“The economy fell into the worst crisis in generations after almost a decade — certainly, eight years — of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy.”

Whaaaaaat?  I thought it was a credit crunch, lax regulation, an irresponsible banking system colluding with an irresponsible public piling on debt they couldn’t afford to buy things they didn’t need. Since when was the current economic crisis caused by not addressing health care? Or education? Or how we use energy?  That’s pretty far out there… even for you Tim.

Seriously, Timmy… If this is what you believe caused the economic crisis, then maybe you should step down. That kind of a statement is either simple felony stupid or reckless historical revisionism to get political points.

bailout, credit crisis, fed, geithner, politics, rescue, treasuries, treasury

I was just reviewing and reorganizing my “…for further study” page and I tripped upon this quote. I had to post it again because I am still baffled and befuddled by what this means.

Maybe what it means is what he says? Is it even reasonable to postulate that our current economic conundrum is the simple result of one man’s mistaken economic theory? Could it all be that simple? 

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

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