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

By Hibah Yousuf August 30, 2011: 1:08 PM ET

NEW YORK (CNNMoney) — Investors have been pouring their money into U.S. Treasuries all year, much to the consternation of bond guru Bill Gross, who had been advocating for investors to dump out of government debt because of their low yields.

Gross, who manages the world’s biggest bond fund, is now admitting that he struck out.

Read the rest of the article at cnn.com here.

Economy of the United States, Federal Reserve System, Financial Times, Pimco, United States, United States Department of the Treasury, United States Treasury security, William H. Gross

OK, I’ll shut up now. I’m taking my ball and going home.

If you’ve been reading my comments for any more than a month, you’ll see that I can’t shut up about Treasuries… “They’re a good investment, that you need to own them, that they look like a good trade, that the biggest bond buyer in the world hates them… and then he was wrong.“ Starting with this post in February of this year (2011) where I laid out my original rationale for owning longer treasuries through the exchange traded fund, the TLT.

…and now I’m gone. Done. Sold them all. Why? Because everyone wants to own them now. There’s a bit of stock market panic in the street and everyone’s rushing toward treasury bonds.

Here’s a chart along with my narrative. You can plainly see that something is “out of whack” on the right hand side of the chart:

The last time I personally observed panic demand for these bonds was during December of 2008 and we happened to own a bunch of them back then too…. and I was more than happy to sell them out of client accounts back then too.

A couple of days ago I wrote an article about how we reserve part of a portfolio for bonds and a part for stocks, and we move in and out of the asset classes as appropriate. You can probably guess that most (if not all) of the bond portion of our accounts have been filled out with TLT since February.

Now, the tactical bond portion is empty again… as you probably figured out.

Here’s where it gets interesting… We’ve been unloading stocks out of client accounts since my May 2011 post called, “Time to Start Digging?”. As I write this post, we’re left with only about 6% to 8% of our capital in stocks because of it.

For clients, this means that for the last couple of months and doubly the last week or so, we’ve made more on the bond side than we gave up on the stock side… which is exactly what I tried to explain what I was shooting for a couple of days ago.

Of course, the tactical cupboard is bare. We’re out of stocks and out of bonds. And you know what? Given all the goofiness in the world at the moment, I can’t imagine a better place to be right now. Not to mention I’ll finally shut up about those damn bonds!

Asset, Bond market, Business, Exchange-traded fund, investing, stock market, stocks, United States Treasury security

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