Are Treasuries The Next Bubble?

Good Evening Folks!

Another crazy day in the markets. It appears that everyone is now asking themselves the same question:

Where in the heck should I put my money?

Its pretty pathetic when the one place in the market that's considered to be the "safe haven of all safe havens" appears to be turning into a giant bubble that's filled with a huge group panicked investors and the Fed who continues to buy their own debt.

Has the world gone mad? Everyday I see something that is unprecedented. Watching the Fed buy its own debt reminds me of a cat run in circles as it chases its own tail? The cat never wins in this game and neither will the Fed!

You need to ask yourself this question: Is there any safe place to put your money anymore? I mean basically here are your safe haven options right now:

A) You can buy the treasuries at zero yield from the US government that's on a one way ticket to bankruptcy.

Or:

B) You can buy CD's from an insolvent bank backed by an FDIC "IOU".

Wow what wonderful options! I bet you are having a tough time choosing from these two fine options! (sigh). I do believe that a bubble is forming in the treasury market. The problem is right now there really is no other choice. In the short term I would still buy treasuries until there is another viable alternative.

If another viable flight to safety option is created, it could attract more money than the rights to publish Branjolina's new baby photos. I could see gold becoming the new flight to safety if the treasury market becomes too ridiculously overbought(ummm maybe we are already there?).

I am going to watch gold here like a hawk. The deflation problem is keeping it fairly cheap and this is the one area where I can see money flying as the treasury market turns into the next great bubble. Gold has acted as a flight to safety in the past and we all know history repeats itself.

I must admit I was really hoping we were done with bubbles. Leave it to the good ole US of A to find a new one! The bond market will dislocate at some point but not before there is somewhere else to run and hide.

Another flight to safety down the road could become assets as deflation destroys their value and they become cheap. I mean why not buy a house for pennies on the dollar a couple years from now versus buying worthless US treasury debt? You can't sleep in your treasuries or raise a family in them!

Deflation:

Most investors just want to find some way to simply preserve their capital right now. I personally am seriously starting to think that the mattress might be the best option. As deflation begins to severely take hold, cash will be king. This is why the dollar is going parabolic. Many investor's riches during the "bubble economy" were tied up in assets like houses that are now crumbling in value. This negative wealth effect is devastating when it comes to the consumer.

Companies have virtually zero pricing power with consumers in a deflationary environment where no one is buying. This can devestate the bottom line. Once these price deflation death spirals begin they are awfully difficult to get out of. Deflation scares the hell out of the Fed much more than inflation. The Fed can always raise rates to quell inflation. However, they are defenseless when it comes to deflation because they cannot force consumers to consume!

Economies can be destroyed when consumers run to the sidelines and wait for further price drops.

I explained this scenario in an earlier post:

If prices continue to drop, why buy now when it will only be cheaper later. This is what happened in Japan 26 years ago and their economy still hasn't recovered since. Their markets are still sitting near their lows more than two decades after this devastating deflation spiral began.

Folks, the exact same thing is going to happen here and we are now starting to see some data that proves it. :

Non-financial Implicit Price Deflator QtoQ Annualized

Final Take:

This chart takes a look at consumer by using a basket of goods and services to measure the purchasing habits of the consumer. As you can see above, consumers are dropping down and buying cheaper goods versus more expensive ones in a major way. This shouldn't surprise you. I see it everyday. Anyone been to a Walmart lately? They are packed! Look at their stock price. The .99 cent stores are also doing extremely well.

We will soon be a "trailer park" nation that is filled with US consumers wearing Wrangler jeans with orange stitches. This chart is frightening folks. Look at the dropoff in 2008. Its dropping like no other time going back to the early '80's. As I said before, once this starts and dollars become scarce as people lose jobs and try and payoff debt, its awfully difficult to stop.

Inflation is still off the radar now because people have no money to upgrade and pay more for basic goods! This won't last forever though. Inflation down the road will come back with a vengeance. More on this later.

Bottom Line:

Please stay on the sidelines if you need to buy a house. You will save yourself a small fortune in doing so. If you are hell bent on buying a flatscreen TV at least wait until after the holidays. Look at the deflator price action above folks! Its a buyers market when it comes to consumer items! I saw a 46" for $1200 the other day. That thing will be under a grand once X-mas is over. I am salivating already.

The markets:

We were do for a pullback after the bull run we have seen. We had been up 9 of the last 11 days before today. I don't read too much into it. The market continues to hang in there despite horrific news today from Texas Inststruments, FedEx, and the treasury market yields.

I didn't buy or sell anything today. Citi held up well so I continued to hold my calls. The automotive saga should be a market mover tomorrow. I still think we will continue to move higher in the short term with a few bumps in between. Some good fund managers have bought stocks in the last few days. Ken Heebner bought a boatload of financials this week. He has gotten killed this year but is still one of the better fund managers on the street. There was also a lot of bullish action in the options market.

The news in the past week couldn't have been worse for the bulls yet the markets have held up reasonably well. I know I know: It makes no sense to me either folks! I still come back to the fact that the market was slaughtered this year and a bounce was inevitable. There is no fundamental thesis to support this move other than we were due for a retrace.

I will continue to watch the price action very closely. The bottom of this market could fallout at any moment based on the news flow but I don't sense that its going to happen before the holidays. I sense that many investors are worn out from all of the gloom and doom and are ready for a break.

Taking a few weeks off might be a good thing for both the bears and the bulls.

Until Tomorrow!

The Bounce Continues!

Good Afternoon Folks!

Stocks continued to rally today as Wall St cheered the new economic plan that was laid out by Obama over the weekend. Here is a great summary on the rally from Bloomberg:

"Dec. 8 (Bloomberg) -- Stocks rose around the world, sending the Standard & Poor’s 500 Index to a one-month high, as President-elect Barack Obama pledged to boost the economy with the biggest public-works spending package since the 1950s.

U.S. Steel Corp. and Alcoa Inc. climbed at least 19 percent, while Chevron Corp. added 5 percent, as Obama’s plan to increase infrastructure spending spurred gains in commodities. General Motors Corp. jumped as much as 25 percent as lawmakers agreed in principle with the White House to provide funds to shore up the car industry. Benchmark indexes in Germany and France added more than 7.6 percent, while Tokyo’s Nikkei 225 climbed 5.2 percent, as Siemens AG and Komatsu Ltd. rallied.

“Hopefully it helps get the economy turned around, jumpstarting private spending with public spending,” said Bill Stone, who helps oversee about $56 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “That’s the whole point of this is to try to get that jumpstart going.”

My Take:

Obama's New Deal Part 2 cracks me up. How is this going to fix our economic problems? Can you imagine seeing unemployed Wall Streeters who were making 500k a year agreeing to put on a pair of work boots and begin laying concrete for $20/hour as we rebuild America? I can't either. Obama will end up creating 2.5 million jobs that no one wants.

We are in for some seriously bad times if the government thinks we need another New Deal in order to get out of this.

The Markets

Interesting day today. The bulls continued the momentum from Friday and took stocks up close to 4%. This rally is getting some serious legs. Obama is offering investors hope just like the Fed did when it bailed out Bear Stearns. That was one nasty two month rally if you were short.

I learned some big lessons after that bear pounding. Luckily, I was mainly in ETF's and held onto them thinking that the fundamentals would prove me right. Luckily in May, the market fell apart again and those ETF shorts became profitable.

The main thing that I learned from that experience is that government interventions/actions can reverse the markets for a long period of time if the people believe that hope for a recovery has been restored. Investors are extremely bullish by nature. They will buy on any news as long as its got a nice story behind it. Obama's hope and change message looks to be working so far.

What I find even more dangerous about this Obama "hope" rally is the fact that the market has severely sold off. When Bear Stearns occurred, the market rallied from much loftier levels. This tells me that there is a chance that this retrace rally may be more severe than the Bear Stearns run in March.

That being said, I can't see this market moving too much higher. My guess is the DOW could get back up to around 10,000 before starting to tank again. I mean things are still going to hell and investors are in a panic. Example: Bloomberg reported that yields on short term treasuries today were the lowest seen since 1929!:

"Dec. 8 (Bloomberg) -- The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929 amid record demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.

The bills were sold at a high discount rate of 0.005 percent, the Treasury said today in Washington. At last week’s auction, the bills drew a rate of 0.05 percent. The government received bids for the bills totaling more than triple the amount sold."

Bottom Line:

As you can see above, we are seeing historical movements in the markets on a daily basis.

I made a few trades today. I sold my GDX calls on the bounce in gold today. Gold could still move higher here especially if it begins to be viewed as a currency alternative to the US dollar. However, deflation makes gold a risky play and the calls were nicely profitable so I decided to dump them.

I also(warning, you all might think I am crazy with this one) bought some Jan $9 calls on Citi (C). No I didn't take any drugs today before I bought these! I have a little thesis on the large banks for the short term.

The government has pretty much come out and said they will not let the chosen banks fail. The chosen ones being banks like BofA, Citi, Wells Fargo etc. My main concern that had prevented me from jumping into one of these short term was the risk of the government coming in with liquidity injections and wipe out the equity holders.

This concern was quelled once the Citigroup bailout went down and the common equity holders were kept whole.

The Citi bailout basically gives you the map on how the feds plan on saving these banks. I figured C would be nice little long play short term once I saw that they did not wipe out the equity.

Please note that long term I am extremely bearish on all of these companies because housing is going to continue to get worse. However, short term, you can own the big banks knowing that they won't go bankrupt because you know the government is going to backstop them. You now also know that they won't wipe you out as an equity holder if they need to go in and prop them up with more capital.

I will not be holding C very long and I played small on this one. In fact, I may only hold these calls for a few days. I am still very much a bear! The economy is a disaster and we are going to face some extremely challenging times in 2009.

The way I see it now, the higher this market goes, the better the entry points will be for going short down the road. I will continue to play small ball as this relief rally continues. I must say I am beginning to drool watching SRS free fall day after day. I refuse to buy here after Obama's comments on infrastructure. The REITS could move higher for awhile on the hope that Obama's New Deal will need a lot of commercial buildings as we work on our infrastructure. We all know thats not going to last!

If SRS gets into the 60's I am backing up the truck.

Until next time!

Marc Faber Speaks!

This video features an excellent summary on the state of the world finaancial markets by Economist Marc Faber. His calls have been very accurate over the last few years. Is the Treasury market the last bubble that hasn't popped? Marc thinks so and so do I.

I will be shorting treasuries in the very near future by buying TBT and buying PUTS on TLT. Now is not the time to be doing this because the Fed has been buying the 10-year which has kept yields low. However, the Fed's actions in the bond market cannot be sustained and eventually treasuries are going to take a nosedive.

Treasuries will be further pressured as countries like China and Russia slow down their purchases and start to spend more money at home as the world financial crisis deepens.

Enjoy the video. I think its a great one!






Edit: On the humorous side

I think this is the funniest thing I have ever seen. I was belly laughing. Make sure you check this out!