Tuesday, December 29, 2009
Tequila, eggnog, and nacho cheese is a bad combination.
This is obvious to the disinterested and sober observer. But to the drunkard stumbling out of his office holiday party and passing by his favorite Mexican restaurant, combining the three ingredients may seem like a good idea at the time.
It is only in the aftermath, when the drunkard is hugging oval shaped porcelain, that he recognizes the folly of his ways.
And so it will be with the folks buying Treasury bonds today. The allure of 4% returns is irresistible to investors drunk on the brandy-laden eggnog idea of the Fed keeping interest rates low for an "extended" period.
After all, money markets pay zilch. And T-bills were recently auctioned off with a negative yield. So anyone hungry for any sort of guaranteed return looks at a 3.8% yield for 10 years with the same eyes as a drunk with the munchies looks at a Velveeta covered pile of tortilla chips.
But the temporary satisfaction ultimately leads to intestinal discomfort.
Long-term interest rates are abnormally low because the Fed has ventured into the marketplace and is using your tax dollars to prop up bond prices so banks and other financial institutions don't have to recognize the true value of their mortgage backed securities. The Fed has agreed to continue this farce through March 2010.
Come April, however, bond investors will collectively hug the American Standard toilet and hurl as their investment prices swirl downward into the sewage where they rightfully belong. Some things can't be held back.
A government cannot absorb ever-expanding trillion-dollar deficits any more efficiently than the human body can absorb the eggnog, tequila, and processed cheese mix. At some point, there is a negative reaction.
And you won't want to be around when that reaction occurs.
That's why the absolute dumbest investment in the world right now is the 10-year U.S. Treasury Note.
Sure, 3.8% looks like a good return with T-bills at 0% and with stocks trading at historically high multiples. But it's deceptive. The yield is artificially low because of the Fed's interference in the marketplace. Once the Fed steps out of the way and the bonds trade based on real demand, prices will drop.
It may not happen in the next few weeks, or even in the next couple of months. But it will happen.
And combining investor optimism, a lack of alternative investments, and a low yield on long-term securities will lead to disaster.
You can buy stock in toilet manufacturers… or you can short the U.S. Treasury bond market. Both are valid investments in this market environment.
Best regards and good trading,
Natural gas continues its climb... The fuel jumped 5% yesterday, surging 22% in December.
Two-year yield races to 1.01% after touching 0.61% just a month ago.
Personal tool companies Black & Decker, Snap-On, and Lincoln Electric hit fresh highs.