Most of the time I will torch financial journalists for their columns. The one written by Andrew Bary in this week's Barron's is a worthy read by individual investors trying as I am to navigate a difficult market. Barrons.com I would add a caveat. He mentions buying TBT, the ultrashort ETF for the 20 year U.S. treasury. This ETF is designed to go up twice as much as the 20 year Treasury goes down in price and up in yield, and vice versa. I have already made a purchase in that security. I would not buy such a security as an investment or even as a way to play the eventual popping of the U.S. treasury asset bubble. I am way too cautious for that kind of speculation. There are certainly many people inclined to invest money in that way. Instead, I was a recent buyer of TBT to create a hedge for a long term corporate bond portfolio which expanded many times over during the September to December 2008 time frame..
Being a cautious sort, I have only started the hedge. While the benefits of being cautious outweigh the detriments, one negative feature of this personality trait is that events will move at a faster past than I am willing to move. I move pretty fast as it is for an old man. The reversal in the recent parabolic moves in long U.S. treasuries may very well happen faster than I anticipated, thereby affording me an inadequate opportunity to create the hedge in full.
I mention earlier in this post an add in the ETF LQD, which contains 101 investment grade bonds, and Bary mentions this ETF also. LQD AND POM I did incorrectly state in an earlier post that I am reinvesting dividends paid by this ETF into buying additional shares. I looked at the History section in my main account yesterday and saw the dividend had been paid in cash. I had never set LQD up to reinvest dividends since payment in cash is my default option unless I change it for a particular security. The position has now increased over $10 since I bought it a few weeks ago, bringing the yield back down to close 5% at the current price of over 100. LQD Stock Quote - iShares:GS $ InvesTop Stock Quote - LQD Quote - LQD Stock Price I also mentioned that I changed recently TFI, an ETF for municipal bonds, from reinvestment of dividends to payment in cash, and I managed to state that correctly. I am currently reinvesting dividends only in BWX and WIP, partly due to my view that the U.S. dollar will likely weaken against many foreign currencies as world investors make a more realistic assessment about the growing debt burden of the U.S. government and the balance sheets of your average U.S. consumer, with the concomitant need to weaken the dollar and reflate the economy with excessive fiscal and monetary stimulus. Those concerns may also cause me to jettison LQD sometime in the first half of 2009. Thus, I will not make the effort to reinvest the dividends since I am skeptical now of LQD being a worthy long term hold at the current price. I really do not have a problem agreeing with those who believe inflation will fall for several months. I simply find it difficult to accept that inflation will not accelerate later this year in response to the massive monetary and fiscal stimulus by the Federal Reserve and the U.S. government. When managing my portfolio, I can not act based on another person's view that the 30 year treasury will fall to 1%. I can only act on my own opinions which may turn out to be wrong. We all know that an acceleration of inflation and inflation expectations are not consistent with U.S. treasury paper yielding, even after the yields rose last week, only 1.67% for a 5 year, 2.36% for a 10 year, and 2.8% for a 30 year. WSJ.com If anyone wants to feed the beast at those negative real rate of returns, then be my guest. I certainly would support their decision as a taxpayer and just wish the treasury would sell them even more paper for 30 years, let them gorge themselves on it until they bust, let them have all of that 30 year paper they are willing to buy. Why? What is going to happen to the budget deficit when the short rates start to spike, and this will happen, and most of the U.S. debt is short term and in need of constant refinancing. Refinancing is not an option, because ultimately it is a Ponzi game of using new money to pay off the older investors .
Bary points out that the long treasury bond would fall 25% in value by simply moving up to yield 4.35% which is where it stood on 11/13/2008. I am not willing to lend the government money at 4.35% for 30 years. I do regret not buying long dated U.S. paper in 1981 when I could have received around 14% for 30 years. http://www.federalreserve.gov/releases/h15/data/Monthly/H15_TCMNOM_Y30.txt
I was also interested in the Barron's article about the creator of the Dilbert cartoon and will start reading his blog. Scott Adams Blog:
My main criticism of Bary and a few others that seem to be on the ball, somewhat, is that they are late to join the party. He may or may not have the timing right on the popping of the U.S. treasury asset bubble. Personally, I hope that his timing is off since I need to do adds to my hedge. But he is late to the investment grade corporate bond opportunities. I did send him an email several months ago discussing mispriced Trust Certificates and other bond investments when a column, similar to the ones he wrote in the last two issues, would have been a major benefit to shell shocked individual investors.