Tulip Mania
Research for Online Investors

by John Dalt

8/25/10

Hyperbole runs rampant on the internet.  Your author tries to avoid the temptation to partake in scary overdramatic characterizations.  We stand by the premise of yesterday’s article.  Treasury bond prices are reaching a level to really hurt some people.  The people that are most likely to be hurt are small investors.

One of the most well known and first recorded market bubbles was in Tulip Bulbs from 1736 thru 1737 in the Netherlands.  People paid more than ten year’s wages for one tulip bulb, until the prices crashed.  Since Tulips must be planted in the early fall and bloom in the spring, a futures market developed for the bulbs.  Contracts were signed, some traders went short the market, but the government didn’t enforce their contracts.  Losers could walk away from their trades without penalty.  Does this sound familiar?

Semper Augustus was the most expensive bulb sold during Tulip Mania!
Was it worth 10-years labor?

To call treasuries a bubble may have been a misuse of a “technical term.”  Bubbles are created by hysteria; we don’t see enthusiasm for Treasury bond purchases.  What investor would brag about buying a 10-year bond and “locking in a sweet” 2.4% return until the kids start college?

Inexperienced investors may not realize the smart money move in treasuries.  There is no intention on holding the fixed asset.  Bonds are traded as easily as stocks.  Traders are simply buying treasuries as a bet that interest rates are moving lower.  These are the same traders that invest in currencies or crude oil.

If you believe interest rates are going to move lower in the short term, you buy treasuries.  The math is exactly opposite of yesterdays.  A 10-year treasury yielding 3% gains in value as interest rates drop.  If current interest rates are 2%, how much is an older 3% bond worth?  A 2% bond pays $20 per $1000 face value.  A 3% bond pays $30 per year.  That would make the 3% bond worth $1500 in current market conditions.  Of course there is an adjustment because you will only receive the face value of $1000 upon maturity.  But interest income drives the value of bonds.

Believe me, traders are anxious to sell you their higher yielding bonds, and take the capital gain.  This is where the peak will be reached.  When traders start taking profits on their holdings.  When they see the warning signs that downward pressure is subsiding, they will distribute (sell) their holdings.

Once selling starts, it takes time to unwind but the direction of the market is determined.  As with any oversupply market, the prices can move quickly.  Thus, the comparison to a speculative bubble!

The slower traders, or investors that were late to the market may also be late getting out.  Here is the cruel reality for inexperienced investors.  They were scared away from equities after taking losses in April and May, so they buy a “safe” treasury bond.  The prices on bonds have been bid up and are ready to pop and move lower; just after retail investors have established their positions.  Trapping the 'rubes' again.

Now is the time to sell your fixed term investments.  Interest rates are close to the rates last seen in December 2008; right after the credit crisis began.  Don’t wait to sell when the exits are crowded!

Tulip mania made some people wealthy and some poor.  Just remember, you never lose money taking a profit.  Don’t be greedy!

To the mailbag:
I enjoy MarketToday, but am not able to view charts or pictures.  What is necessary?---subscriber E.W.

John’s Reply:  We email two versions of all of our communications.  One contains full vision charts and pictures.  The other is text only for mobile devices and subscribers that have slower internet connections.  We try to put the link to our homepage in place of the missing graphic.  Just follow that link and go to the article on our website.  MarketToday articles are listed on the left side of our home page.

Quote:
Eagles may soar, but weasels don't get sucked into jet engines.-Larry the Cable Guy

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.

MarketToday Home Page

Back to Top