Bonds Lose Luster
Research for Online Investors

by John Dalt

5/07/09

The Treasury Bond Auction today did not attract enough buyers. Interest rates shot up on long-term bonds at noon trapping bondholders. The explanation may not be as simple as you think. Money is moving to the stock market as everyone wants to participate in the rally. But, how do you quantify secured bondholders being shuffled to the side in a bankruptcy? It may not bother you, if you do not own bonds. It seems to bother the secured bondholders of Chrysler. If the secured bondholders of Chrysler are not paid as required by law, bond issuers will pay the price on future issues. If a secured bond is not secure, this could really upset the apple cart in financing for other businesses. Bondholders buy safety; they trade higher gains for safe long-term returns. If this security in owning bonds were damaged, why would retirees and institutions buy secured bonds?

T he market woke up today to recognize there might be some small concern over banks that have to raise billions, and persistent unemployment numbers.  Maybe it was talk of cap and trade, or the government taking over health care, a big chunk of the economy.  The market bit the late arrivers to the rally.  The Labor Department issued a mixed report on productivity and declining jobless claims.  601,000 initial unemployment benefit claims is higher than the 491,000 released yesterday by ADT.  The official unemployment figures come out tomorrow before market open.  UPI carried a news item on the market action today.

The New York Times covered GM’s situation. G.M. lost $6 billion in the first quarter as revenue fell almost 50% on 40% lower sales. GM burned through over $10 billion cash, in the first quarter. They are watching the Chrysler bankruptcy proceedings, as it appears all paths lead to the courts.

Crude Oil moved higher today. Our Swing Trader position in natural gas (UNG) is up 6% since this morning. We do not shoot for one-day trades, but this one was a nice surprise. We will try to lock it in and ride for bigger profits. Maybe you should join Swing Trader!  

With oil going higher, this reprint might be of interest to you. 

Reprinted from 1/13/09 MarketWatch:

$1.70 Gasoline for Next Year 

You may want to consider protection from the future cost of gasoline.  You can do this with the United States Oil Fund (USO), or the U.S. Gas Fund (UGA).  Both of these funds invest in near month futures to replicate the movement in the price of the commodity.  I like the USO because it is heavily traded.  Gasoline does not follow crude pricing perfectly because of refining.  Refiners may command a higher or lower crack spread on gasoline at different times depending on supply and demand.  Traditionally the summer driving season increases demand for gasoline and the crack spread widens.  Foreign competition, oversupply to the market and demand destruction last year kept a lid on profits for the refiners.  

If you plan to drive 20,000 miles next year and your car gets 17 miles to the gallon, you will use 1177 gallons of gas.  Today the price of gas is about $1.70.  1.70 X 1177 = $2001.  Today you can buy $2000 worth of one of these ETF’s and drive next year for the same net price.  You might want to buy a few years worth!  

I will close today with a quote sent to me by a reader:  

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance."

- Cicero - 55 BC  

I bet Cicero and all Romans wished they had listened.  Historians estimate that 20% of the population of Rome became freeloaders that lived off the state.  Rome’s population fell after the wealthy residents refused to support them any longer.

MarketWatch Home Page

Back to Top