Immediate Short Selling Opportunity in Bonds

Investors Fleeing Out of Stocks and into a Market Top in Treasuries

Investors were fleeing the stock market Friday and investing in the 20 to 30 Year US Treasury Bonds, traded by the ETF, iShares Lehman 20+ Year Treas. Bond (TLT).

The Treasuries have not yet conceded to the report that inflation is surging at its worse level in 17 years (Martin Crutsinger of the Associated Press) as investors are perceiving the government bonds to be a 'lifeboat of safety'; but "safe they ain't" as the Treasures are eventually going to concede to continued reports of inflation, as well as concede to the yield curve which is seen steepening.

Given the impending downturn in U.S. Treasuries, it is opportune to 'dollar cost average' sells of the 20 to 30 year Treasuries ETF, TLT.

In a similar vain, and of more immediate opportunity, is to short sell the closed end municipal bond funds Van Kampen Trust for Investment Grade Municipals (VGM), Eaton Vance Insured Municipal Bond (EIM), Blackrock Municipal 2020 Term Trust (BKK), MFS High Income Municipal Trust (CXE) and PIMCO California Municipal Income Fund III (PZC).

The logic for short selling these comes from the fact they have gone ex-dividend and off record.

Additional logic comes from concerns every day that their insurers, i.e. AMBAC (ABK), are not going concerns (see footnotes below); without their traditional insurance, the municipal bonds are likely to fall drastically in value, greatly rewarding those who are short.

Short Selling Opportunities Diminished in Many Stock Indices, Sectors; Ripe in Bonds

Tim Knight, in his article Midpoint, provides this chart of the Russell 2000 which indicates the lack of a good short selling entry point in stocks; and relates: "We are once again that exasperating middleground of Fibonacci-land where the distance between the Fib lines is about the same. It makes it awkward to take a position"; to which I agree.

Friday's Stockcharts.com overall chart shows the strong down draft that has come to stocks, caused by Ben Bernanke's testimony before Congress, which precludes a good short selling entry point in stocks.

Investment Application

Specifically, I encourage one to be long the gold ETF (GLD), and use margin credit to short the US Treasuries; and also the closed end mutual bond funds: with 20% of one's margin credit to 'dollar cost average in shorts' of the 20-30 year U.S. Treasury ETF, TLT; and with 80% of one's margin credit to sell -- put the closed end municipal bond funds listed above.

Footnotes

• Death Blow For Ambac?
• Ambac Slashes Dividend and Reports Loss of $32.83 Per Share

Charts of selected closed end Municipal Bond Funds indicate the "immediacy" of the short selling opportunity in municipal debt. These charts show that a downfall is coming most likely tomorrow, and if not tomorrow, within days, where as the downfall coming to US Treasuries could be delayed a week or more.

The Yield Curve is seen steepening. This implies inflation; and also suggests the wisdom of investing in gold.

Comments

[fgjsfd;g]

Which muni is the best short? (Or all the same?)

[User 123297]

how long a time frame should these puts run? thanks. bob

[mjohnh]

Interesting article: Is the recommendation to short the muni etfs based on the chart, only; or, based on the pending failure of the insurers? If the latter, are uninsured bond etfs at equal risk of a downfall? If a fall off in market price, when would you expect it to recover; what market conditions would be required for such recovery?