Why I Feel TBT Is About to Become a Goldmine 41 comments
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TBT is an ETF which corresponds to twice the inverse of the daily performance of the Lehman Brothers 20+ Year U.S. Treasury index. The fund normally invests at least 80% of assets to investments that, in combination, have economic characteristics that are inverse to those of the index. It also typically invests in taking positions in financial instruments, including derivatives that should have similar daily return characteristics as twice the inverse of the index. The fund is nondiversified.
Why am I saying it is going to become a goldmine? First the Fed has lowered its interest rates nearly to zero. It has very little room to lower them further. The bond yields are extremely low. This means they can really only go down in value. As the Fed raises rates, this should happen dramatically.
A second point is that all of the bailout monies have to be funded. They will be funded by bonds. If there is a surplus of those bonds, the bonds will have to be sold for less money (higher yield). This means the bonds will go down in value. Extra selling sessions have already been scheduled to allow for these greater numbers of bond sales. More seem likely to be added in the future.
Why am I writing this article now? Today the Bundesbank, the German central bank, had to buy up some of their own bonds at their sale. They could not sell them all for the first time in a long time. Even though people are scared out of their wits about the stock market, they could not sell all of their bonds. The German bonds are generally thought to be the most secure in the world after the U.S. bonds. If Germany cannot sell all of their bonds, it will not be long before the U.S. has the same problem.
Does this mean I am advocating a smaller stimulus package? No! It does not! We need a big stimulus package to get the economy going. We just need to be aware that we will have bond inflation. We need to be extremely aware that we will have to make the trade deficit disappear in order to have a prayer of repaying all of this money.
To do this we have to first get rid of our biggest trade expense, oil. I am hoping Obama gives his energy policy a high priority. It has to be a high priority for the U.S. economy to have a chance at health in the near future. In the meantime, an investment in TBT sounds like a very good idea.
Disclosure: Long TBT
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This article has 41 comments:
1. I agree with your premise, and have been thinking something similar for a while now. I appreciated the information about the German bond sales; I hadn't heard that.
2. There is no doubt about the logic of your argument; time frame is unlikely. I "know" Apple's share price is going up... but is it going up this year? Next? Today? I would caution people ready to jump on the oil and short bond bandwagon. Your money could be tied up for a while. If something is a "sure" thing, you can be sure that Mr. Market will find a way to take that advantage away from you.
3. I disagree with your assertion that the US needs a big spending stimulus plan. No country spent their way into prosperity. With that said - and realizing that irresponsible spending has been and will be the norm - I hope that Mr. Obama uses the money for encouraging industrial growth in this nation. America desperately needs to get back on the "producer nations" list. The days of a debt-based consumer economy are over. Our leadership needs to lead by example.
The US is not Germany. Look at the price action yesterday. Capital continues to flow into Treasuries at the expense of all other instruments. Unless you can explain why your timing is spot on, a short position in TLT is probably a better play.
I focus my investing efforts and blog on 2X ETF's but I can't recommend the ultra shorts because of their terrible performance. Where possible, it is far better to short the ultra than it is to buy the ultra short. For example, my US timer gave me a get-out-the-market signal on June 11, 2008. Had I purchased QID (ultra short on Nasdaq 100) I would have made 64% as of yesterday's close. Had I shorted QLD (ultra long on Nasdaq 100) and closed the position yesterday, I would have made 253%. This decay issue with the ultra short ETF's has been discussed in a number of posts here at Seeking Alpha and we should all be familiar with it in my opinion.
1. We are still in a deflationary "scare" and risk aversion
2. The Treasury does not need to issue debt IF the Fed is buying it up (ie creating $$). The Treasury debt DID NOT go up in December
A Japan like liquidity trap has kept their bonds at 1% for ten years! Same here? I don't know.
This is an excellent discussion. I, like David have been long TBT for a couple of months. I was down about 30%, now recovered to down 18%. I am selling.
My reasons:
1. TBT (and most ultrashort ETFs) are short-term vehicles because of the performance "decay" over time (discussed by many).
2. My readings are negative for the S&P 500 for the next several days (possibly stretching into weeks). Bonds will rise temporarily if there is a significant drop in stocks (flight to safety).
3. Until the current negative momentum in stocks is broken, better short-term positions are SDS, SKF and QLD.
www.bloomberg.com/apps...
I was EXTREMELY impressed with your logical connection between the price of Treasuries and the cost of energy. So long as we continue to ignore the trade deficit generated by importing oil, our economy CANNOT recover.
Put another way, there is NO country in the history of the world whose economy has been successful without fully utilizing its own abundant (least cost) domestic energy resources. And we presently boycott ours!
On Jan 13 07:39 AM fjpenney wrote:
> Others have recommended this trade but I wish you luck with the purchase
> of an ultra short ETF. As noted in the comment above, the decay will
> kill you.
>
> I focus my investing efforts and blog on 2X ETF's but I can't recommend
> the ultra shorts because of their terrible performance. Where possible,
> it is far better to short the ultra than it is to buy the ultra short.
> For example, my US timer gave me a get-out-the-market signal on June
> 11, 2008. Had I purchased QID (ultra short on Nasdaq 100) I would
> have made 64% as of yesterday's close. Had I shorted QLD (ultra long
> on Nasdaq 100) and closed the position yesterday, I would have made
> 253%. This decay issue with the ultra short ETF's has been discussed
> in a number of posts here at Seeking Alpha and we should all be familiar
> with it in my opinion.
As we sent money overseas for high priced oil, the money was recycled into our Treasuries, keeping interest rates artificially low. As we imported goods from China, they essentially provided vendor financing by purchasing our Treasuries, keeping rates artificially low.
Now that oil is at a fraction of its former price, and now that our imports are plunging, who is the incremental buyer of Treasuries?
You will have reduced demand for Treasuries just as supply surges due to massive deficit spending. What do you think will happen to Treasury prices? And if, in addition, the dollar drops...how long before foreigners unload?
1. QE comes to an end as investors get the slightest whiff of inflation and sell out of Treasuries, and possibly into equities/TIPs
2. US loses their AAA rating.
3. We see a flood of other AA/AAA rated corporate debt issues. FedEx/McDonalds are already talking about their upcoming issues. We see a flight out of Treasuries and into these similarly rated and higher yielding corporate debt.
The author of this article is assuming #1 happens. That we eventually get reflation and we sell out of Treasuries. I think that is unlikely to happen anytime soon because of the Fed's wishes to continue QE "for some time" and to keep their ZIRP policy "for some time". They are willing to monetize any debt the Treasury issues.
#2 won't happen anytime soon because S&P said we should be in the clear until 2012. In any case, S&P should be shot for helping us get into this mess in the first place
I believe #3 will be more likely. There have been a lack of issues in the past 6 months, and that can only continue for a little while longer until there is pent-up demand for companies to refinance their debt. In the case of great companies like GE, Wal-Mart, McDonald's with great AA or higher ratings willing to give a great yield spread premium over what the Treasury is offering (pretty much 0 at this point). We could then see a flood of investors leaving Treasuries into something just as safe, but yielding more. This requires confidence, something Obama can give us for nearly free. This is also the true intended policy of the Fed (to encourage private investment rather than hoarding of money).
In either case, TBT would be a good play for all three scenarios.
Purchased TBT on 12-23 at $36.56. Sold Mar 37 covered calls at $4.
If TBT is above $37 on Mar 20, I will be exercised out for a 11% profit in three months (44% APR). If TBT is below $37 on Mar 20, I will sell another covered call. Only if TBT is below $32.56 on Mar 20 will I lose on this trade.
On Jan 13 07:39 AM fjpenney wrote:
> Others have recommended this trade but I wish you luck with the purchase
> of an ultra short ETF. As noted in the comment above, the decay will
> kill you.
>
> I focus my investing efforts and blog on 2X ETF's but I can't recommend
> the ultra shorts because of their terrible performance. Where possible,
> it is far better to short the ultra than it is to buy the ultra short.
> For example, my US timer gave me a get-out-the-market signal on June
> 11, 2008. Had I purchased QID (ultra short on Nasdaq 100) I would
> have made 64% as of yesterday's close. Had I shorted QLD (ultra long
> on Nasdaq 100) and closed the position yesterday, I would have made
> 253%. This decay issue with the ultra short ETF's has been discussed
> in a number of posts here at Seeking Alpha and we should all be familiar
> with it in my opinion.
This type of short fall was not present in previous quarters. The Fed Funds rate could still be cut in previous quarters. In fact the Fed Funds rate going down, and the flight to safety from the stock market probably account for the dismal performance of TBT so far. However, TBT has definitely turned upward of late. You can't expect it to go straight up. There may yet be another flight to safety. Still the Treasury bond values simply cannot go much higher. The only way they can really go is down. With all of this extra debt, there will likely be inflation eventually. In the short term it will become harder and harder to sell all of the bonds needed to finance the extra debt. When you start adding trillions to your debt, it does make people doubt how secure it is. It certainly makes them doubt how good an investment it is. The extra debt seems almost certain to bring on inflation longer term. The immediate acceleration in the debt load (with virtually zero room for fed funds lowering) should make this a good time to get into TBT. The Bundesbank problem is just a signal that it will soon become harder to sell our debt. We have had problems before.
Right now we are being looked at as the safest currency. Eventually the world will come out of a recession, the need for safety will fade. People will look for value. We are still running a trade deficit. Unless that is fixed, the dollar is likely to resume its decline vs other currencies, especially if oil prices skyrocket again, as many are predicting. Don't let your egos do your thinking for you. There are many emerging economies in the world today. We will have to work hard to compete. The possibility of the US Treasuries retaining their value for the next several years seems very dim to me. Each time the fed funds rate is raised, the Treasury Bonds' values will go down. Inflation and oversupply will bring their values down also. I have been encouraged by the recent performance of TBT. I think it should continue to perform for some time to come. Yes, there will be retreats from highs. However, its long term outlook from this point looks fundamentally sound. I think I have made good points, but please do your own research. Then make your own decisions.
Cheers, and good luck!
The problems with 2x invesrse ETF's seem to be concentrated in the small, volatile sectors--the opposite of Treasuries. The 2x inverse for the S&P, for example, has held up very well. Has anybody actually compared the performance of TBT vs. the benchmark?
I would say that buying a put on TLT might be better?
On Jan 13 11:34 PM Scott's Investments wrote:
> Is anyone aware of a pending or existing 1X inverse 20+ treasury
> bond etf? It may be a better bet then the 2x to avoid some of the
> pitfalls of the 2x inverse etf. One other option to avoid performance
> decays of a 2x inverse would be to purchase calls on tbt, sell an
> at the money put, or some other bullish option strategy on tbt.
Here is the link to a good article:
seekingalpha.com/artic...
For those of you looking for a long-term investment vehicle, TIPS prices are predicting 0-2% inflation FOR THE NEXT 10 YEARS, despite the recent fiscal behavior of the US government. "Yea right" I say. Not while gold prices have about 8% inflation expectations priced into them and drunken sailors are being astonished by the government's spending. Massive upside and guaranteed return of capital makes TIPS a winner. Even if treasury prices fall in the future, you can always hold till maturity and collect increasing inflation checks the whole time, paid for by the issuance of more debt, at whatever price the market will bear.
That said, I'm also holding TBT and PST with my "swing for the fences" portfolio allocation.
Then, of course, there is also problem with shorting TLT because while you aren't exposed to the leverage there, you do have the problem with the dividend which you will have to pay back if you are short. And, as others have already said, its best to be patient with this trade anyways. The fed and their QE adds another wrench into the equation and I think this thesis, although most likely corect, will most likely take much longer to play out than many anticipate. We're working on an additional post for the best vehicle to short treasuries with, but in the mean time, we've laid out our rationale behind shorting treasuries www.marketfolly.com/20...
Let me remind all here, buying TBT is like buying ultra long index ETF with one considerable difference, the ticker symbol.
As for all of the comments about the decay factor, I think we have been seeing so much volatility in the markets these days that decay is at the moment a small factor. The huge drop into early december was a combination of interest decreases and a flight to safety. There can't really be any more (or very little) interest decreases. Still the Fed is finding new ways to bring the lending rates down, even without fed funds interest rates. I may have neglected to take that into account enough when I wrote this article. Those actions by the Fed are likely keeping bond prices high. The collapsing stock market is helping also.
I feel there is a lot a validity to what I have said in this article. However, the situation may be more complex and changeable as the Fed employs these novel methods for lowering interest rates (bad for TBT). I am guesstimating now that this lowering process by the Fed may be over in 6 months. I was listening to Bill Gross say that he thought the home loan rates had to go down to 3.5% in order for the housing market to stabilize. It may be that you don't want to buy TBT until that time.
For the traders among you, you can probably buy it near the bottoms of markets. Then you could ride it up. The base interest rates still can't go much lower.
As for the rates staying low for a prolonged period. I think that the predictions for a prolonged recession may mean that they will stay low for longer than we would normally think they would. However, it is clear they will eventually have to rise. Otherwise no one will buy our bonds. Since a huge percentage of them sell to foreigners, that is simply an unacceptable situation over the long term. The interest rates will rise. This will not be like other situations in which the US may have had a trade surplus. Then we did not need to worry if no one else bought our bonds. Now we do. The Fed will raise rates eventually. Otherwise the Treasury will not be able to sell its bonds.
We will need to do our utmost to reverse the current trade deficit. Otherwise our economy will be in very dire straits. A trade surplus will mean a likely rising US dollar. If the US dollar is rising (even if slowly), foreigners will want to buy our bonds because they will be appreciating faster than the simple interest rate on them versus the foreigners' currencies.
Some may say the US dollar has been rising lately. However, that is more an acknowledgement that the US is historically a safe haven in troubled times. Also it is an acknowledgement that the US economy is sounder as oil falls because we are such a big oil trade net debtor. As soon as the troubled times are somewhat resolved, people will stop buying bonds on emotion. They will put their money back into stocks. They will buy the bonds with the highest yields such as Australian bonds. The US dollar will have to prove that it is truly a value. Oil will likely go up. The EIA estimates I looked at recently called for $43/bbl in 2009 and $55/bbl in 2010 on average. Even if we say that looks cheap to us after $150/bbl oil, it will still be a huge factor in our economic health. We need to move quickly away from out dependence on foreign oil. The year after that we may see oil skyrocket again as emerging economies use even more. Perhaps we will see it shoot up sooner. Don't kid yourself that the interest rates will stay low for a prolonged period. It is very unlikely. Think about the interest rates in some of those emerging countries. They can get very high. One of the reasons is that no one will buy their debt.
Still not spending to solve the immediate problems will not resolve the debt issues. It will just put the US economy into a death spiral. The government needs to help keep the economy afloat. As part of that process I hope they will be planning out how we can move away from being a debtor nation.
In sum, it may yet be early to buy TBT for the long term. Paying attention to the real estate loan rate may be a more productive indicator about the buy point for TBT. If Bill Gross is correct, that point might be 3.5% home loans. The point of housing market stabiliztion may be the point at which you want to buy TBT long term. In the short term you can buy it at market bottoms. It should move quickly upward, if the market is.
finance.yahoo.com/q/bc...
Unless you're actually investing on tomorrow's events (not even next month), there is very little reason to hold these things in a portfolio.
On Jan 13 07:22 AM dawase wrote:
> I traded TBT from the 26th of Dec through yesterday. I think the
> double short ETF decay will eat your returns up before the long bond
> turns south. The Fed has already said it expects to engage in QE
> to suppress the long end of the curve. I would be wary of trying
> to take the other side of that trade.
>
> The US is not Germany. Look at the price action yesterday. Capital
> continues to flow into Treasuries at the expense of all other instruments.
> Unless you can explain why your timing is spot on, a short position
> in TLT is probably a better play.
The only solution that doesnt lead to 2-3 years roughly mirroring 1930-1932 is a solution that required an awake population 5+ years ago.
Google: LATOC. That site has been around for years. It's your own damn dumb fault for not reading it, not listening. Karma doesnt reward ignorance. Depressing as it is, the only thing we can really do now is prevent Obama from going Adolph on us. But since that outcome is the desired outcome by those who engineered all of this, the chances are slim it can be prevented.
The other thing to consider is the emerging growth economies. They will use more and more oil (once the recession ends). India and China currently use less than 2 barrels/person. We use over 26. Europe and Japan use 13-15. We are a huge glutton. Clearly our consumption can be cut hugely over time without having a big negative effect on our lifestyle. When India and China start using even 4 barrels/person, the price of oil wil go through the roof because they have such huge populations. We cannot afford to be a huge importer of oil at that point. We will be mired in a never ending recession/depression syndrome. Imrove your attitude. There are too many people who have been saying what you are saying. Therefore we haven't changed when we needed to. You will end up being sorry for your apathy in the long run.
I think that my move will be to double my amount invested and go to RYJUX. Any thoughts on this? Granted my invested capital will be higher, but there should be no decay issues thus, no stress about the duration of the trade.
Comments?
Thanks!
On Jan 21 02:16 AM David White wrote:
> A senior manager of the South Korean National Pension Fund apparently
> suggested today that the pension fund should start selling its US
> Treasuries. He thought they did not have anywhere to go but down.
> This might mean the time to start owning TBT may not be far off.
> I would still tend to wait until you were relatively sure the market
> had bottomed. Now I am seeing some predictions for 500 on the S&P500.
> Definitely there is some near term pressure from the European banking
> systems (and our own also). The Europeans are on the hook for 40-50%
> of the loans made to emerging growth countries. Those countries are
> now starting to default on their loans, as they are completely dependent
> on exporting their goods to make money. This could be very bad news
> for the European banks. It might also be very bad news for the US
> as we might have sold some insurance to them for those loans. The
> US owns a much smaller percentage of the loans. Good Luck.
If we keep going on with this foolish bailout, print, and spend mentality, then there is never going to be enough energy to grow our way out of this mess because we'll never stop wasting energy.
I would suggest that you are the one who is practicing apathy by limiting your thinking. I have explored ideas that can actually turn this country around. The link for my homepage is an example. But first there have to be enough of us actually living in the real world before we can talk about real world solutions.