Bubblicious Treasuries
Research for Online Investors

by John Dalt

8/24/10

According to the Investment Company Institute (ICI), investors have withdrawn $33.12 billion from domestic stock mutual funds in the first seven months of 2010.  The ICI further tells us the money is flowing into…government bonds!

The dip in April-May has evidently scared investors.  They don’t want to go through another drop like March 2009.  But…what the heck.  Government Treasuries are a bubble waiting to pop.

I heard a trader make a comment from the floor, “I am staying close to the door.”  How close to the door can you stay?  Are you ready to exit before the crowd?  It reminds me of the dot.com bust.  Everyone knew it had to end but kept buying anyway.  Do you really think you will beat the pros out of the trade?  To put it another way, “In a game of musical chairs, the professional dancers win.”

I suppose you could buy treasuries now, if you were prepared to own them to maturity.  Will you be satisfied with 2.607% for the next ten years?  How about when the evening news announces that inflation is chugging along at 6%?  That will make you squirm, the longer you hold it, the more you lose in purchasing power.  But, here is where you will get in trouble.

A ten-year bond paying 2.607% returns $26.07 per year per $1000 face value.  Again, if you hold it until maturity, you collect $26.07 every year, and then Uncle Sugar will return your $1000 dollars.  But what if you decide to sell because of inflation or even worse, what if you need the money and have to sell?

Let’s say the interest rate on a 10-year treasury bond has increased to 5%, what is your lower rate bond worth?  The market demands 5%, so you have to sell your bond to pay close to that amount.  Your $1000 bond is worth…$521.40!  Actually it is worth a little more, because of the capital gain when the government pays back the full face value at maturity.

But, here is the important point; it is not worth $1000 if you have to sell it.  And the small investor has been led into another bubble and gotten slaughtered.  Is it any wonder that 9 out of 10 investors lose money?

We can see the last “spike” or bubble from December 2008.  Fear caused investors to flee equities and bid up the price of 20-year Treasuries.  We can see the fall in the first week of January and over the next six months.

Please think about this before you pull out of the market and buy the “safety” of bonds.  Why not spend a hundred bucks and subscribe to our Long-Term Portfolio service.  We are beating the market, again this year.

The futures market is down this morning, and the volume in premarket trading is higher than I have seen it in some time.  This is where the doorway gets small.  The crowd is rushing for the exit.  Remember the “flash crash?”  Who do you think you are going to sell to, when no one is buying?

To the mailbag:
Apparently, more than 50% of the U.S. population does not have the self control to discipline themselves on their diet.  If we are responsible for their healthcare, we need to put controls on their actions!— paid up subscriber T.M.

John’s reply:  And why is society responsible?  Take away the safety net, and let them do what they want and can afford from their own labor.  Freedom involves responsibility!

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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