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Joseph L. Shaefer
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Joseph L. Shaefer is the CEO and Chief Investment Officer of Stanford Wealth Management, LLC, a Registered Investment Advisor. A retired General Officer, he spent 36 years of active and reserve military service, the first six in special operations, the next 30 in intelligence. His firm believes... More
My company:
Stanford Wealth Management LLC
My blog:
The Investor's Edge
My book:
Bringing Home the Gold
  • Inverse Treasury ETFs: “What Everyone Knows” Is Not Worth Knowing 0 comments
    Apr 26, 2010 5:56 PM | about stocks: TBT, TMV



    I try to look beyond the day’s headlines and do my best to imagine what could go right with an unpopular sector or wrong with one everyone has piled into, so sometimes one of my articles will receive a comment like this: “What an idiot you are.  Everyone KNOWS the next stop for the market is Dow 3,000.”  (Received in March 2009 when I predicted the worst was over and it was time to pick up some of those screaming bargains.) 


    There are two reasons why what everyone “knows” is not worth knowing.   First, if everyone already knows (or thinks they know) something, it means their minds are made up so they have most likely already acted on the information.


    The second reason, however, is even more important: what everyone “knows” is frequently wrong!  Some hoary old maxims are simply not true.  You’ll hear people say, “Sell in May and go away.”  If you had done that in 2009 you would have missed 90% of the up-move last year...  How about, “As goes January, so goes the year.”  Hogwash.  Since more years are up than are down, there are simply more up Januaries (and more up years.


    Or, “Buy and hold is the only safe way to make money in the long term.”  Maybe so -- if your idea of long term is 100 years.  But if you had bought and held on since January 1, 1999, when we began our Model Portfolios and began tracking such things, your investments in the S&P 500 stocks would have been...drum-roll, please: down 10.1% in the 11 years ending on Dec 31, 2009.  Before inflation.  None of us can possibly be right on every one of our re-allocation decisions.   But we were right on enough that we kept our clients less invested during some pretty ugly times in the market and more invested during some pretty good times.  That allowed us to gain 226% during that time.  Taking 11 years to triple the value of our portfolios may not be enough to satisfy some, but it certainly beats the -10% that an index fund returned.   And, if John Bogle is correct, some 90% of actively-managed mutual funds did even worse than the index funds!


    Here’s another maxim, this time a hoary new one, that “everyone knows”:  The value of ultra-short ETFs [those that use leverage to double or triple your volatility] are computed daily and ould wipe you out in a matter of a few short weeks or months even if the trend of the underlying security is neutral.  They are only good for shorting.


    I see that many people “know” this because, after discussing that we purchased leveraged inverse US Treasury bonds for ourselves and our clients, I received a number of e-mails or comments like these: “…only a complete fool goes long any ultra ETF…”  “…to gamble with your own money is one thing but to gamble with your clients money is something else,” and  “[You need to] take a time out.”


    I recommend that you research the double-short US Treasury ETF (NYSEARCA:TBT) and, for the brave of heart and the strong of stomach, the triple-short Treasury ETF (TMV.)  I have, and I have concluded they are a relatively low-risk way to play one of the easiest “found money” plays for the coming year.  While rates may come down (and therefore bond prices rise) as a result of some temporary panic, over time I believe this investment will rise appreciably as bonds decline in the face of rising rates.


    Before we mindlessly parrot what some supposed expert said about never buying a double-long or double-short ETFs let’s think about it.  How much do stocks move over a year’s time?  Well, in 2008 they moved 50% down or so and in 2009, they moved up 50% or so (recouping therefore only half of what they lost… 50% of $1 is 50 cents; 50% of 50 cents is a quarter, taking you back to 75 cents, not $1.)  That’s a lot of volatility and, yes, a double-long stock ETF in 2008, or a double-short stock ETF in 2009, had the potential to lay you low, with greater certainty of same coming from triple-leverage ETFs. 


    But we are not talking about common stocks, we are talking about Treasuries here!  How much do Treasuries typically move?  A few basis points a day, maybe?  More likely, a few in a week.  (100 basis points = 1%.)  Over the course of a full year, of course, they might move hugely, but could they move up hugely?  Well, let’s see…


    If yields decline, bond prices move inversely to yield, so the bond would move up.  But since Treasuries are now paying 0% to 0.25%, how much more can yields decline?? Therefore, based on the yield/price relationship, how much more could US Treasury prices increase??  Therefore, why would I be long Treasuries? 


    In a true financial crisis where there are no reasonable global alternatives to the liquidity and possible safety of US Treasuries, I can see a scenario where US Treasuries could go to a negative 0.25% or so before some central banker said, “Wait a minute.  I can pay less than that to store gold!”  That’s why I see US Treasuries as having a cap on their possible upward price.  On the other hand, having lived through the Carter administration and seen a 21.5% prime rate as a result of some screwy policies and politics back then, I don’t see any theoretical limit to how high interest rates could go. 


    Since Treasuries move so little, there is little reward in buying an inverse Treasury ETF without leverage.  Since my downside is somewhat known in advance (“I can pay less than that to store gold!”) and my upside, while not hot! hot! hot!, looks to me like a rather likely outcome, I simply do not assess the danger of these ETFs as being high, as I would an ultra stock ETF.  I view them as a slightly more risky, and therefore slightly more rewarding, way to play  what “the best politicians money can buy” are currently doing to the country: debasing the value of our currency and letting the next generation pay for their profligacy. 


    So we’ll buy the inverse Treasury ETFs even while all the “experts” who “know” that double-short Treasury ETFs “must” decline to zero continue to disparage our decision.  Clearly, I believe they are wrong.   I expect that a panic day worldwide might make investors flee to the safety of US Treasury obligations and that would affect these ETFs negatively that day.  But the slow and inexorable drip, drip, drip (the sound of new money drying) will affect the ETF positively, as well. 

    So far, there is more fear of worldwide depression than worldwide inflation, so these ETFs have trended more downward than upward (from 50 to 48 on TBT.)  You don’t make money looking in the rear-view mirror.  You make money by looking forward.  Buy your straw hats in the fall.


    Of course, the price will jump around more than it would on the actual Treasury bond, but that’s rather the point, isn’t it?  We are accepting the “risk” of greater volatility than the underlying holding would offer -- in exchange for a greater “reward” if we are right.  Risk / reward.  It’s what intelligent investing is all about.  No matter what everyone “knows”…  <  >



    Author's Disclosure: We and / or clients for whom it is appropriate are long either TBT or TMV.

    The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

    Past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but did not do so for 2009. We plan to be back on track on 2010 but “past performance is no guarantee of future results”!

    We encourage you to do your own research on individual issues we recommend for your analysis to see if they might be of value in your own investing. Since we have opted out of the pre-assignment of followers on this website we know that everyone who reads our work came to us of their choosing or were recommended by another reader.  Thank you.  We take our responsibility very seriously to proffer intelligent commentary, but it should not be assumed that investing in any securities we are investing in will always be profitable. We do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.




    Stocks: TBT, TMV
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