Friday, July 1, 2011

"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or give way to hope, fear and greed." --Benjamin Graham

LONG-DATED U.S. TREASURIES ARE A FABULOUS BUY (July 1, 2011): There are numerous funds of long-dated U.S. Treasuries including the exchange-traded fund TLT, the Vanguard fund VUSUX, and the Fidelity fund FLBAX. What these all had in common from the middle of December 2010 through the middle of April 2011 was that they were incredibly out of favor with investors, trading just above four-year lows. Even today, you constantly hear analysts telling you why interest rates are sure to go higher because of budget deficits and a thousand other irrelevant reasons. Earlier this year, we had the largest-ever spread between the yields for 30-year and 2-year Treasuries which exceeded four percent. This spread has contracted modestly since then, but remains at an unusually high level by historic standards, which is thereby providing an unusual opportunity to purchase long-dated Treasuries. Just during the past week, nearly half of the total gains since TLT bottomed on February 10, 2011 at 88.14 have been surrendered, thereby providing an ideal buying opportunity.

During the second half of 2008, long-dated U.S. Treasuries were among the best-performing assets, gaining roughly 45% from bottom to top including reinvested dividends which made their total gains as great as selling short most equities with far less downside risk. It is likely that we have already begun a major bear market for nearly all global risk assets; as investors progressively withdraw money from equities, corporate bonds, and commodities, they will likely begin a flood of inflows into safe-haven alternatives. Since there are very few assets which will be rising in price during any major bear market, long-dated U.S. Treasuries will benefit disproportionately just as they had done three years ago.

Even though most investors remain bearish toward the U.S. dollar, the greenback performed strongly during the last global bear market for risk assets, and it is almost certain to repeat this performance once again. When the U.S. dollar is rising, investors in other countries will be far more eager to accumulate U.S.-dollar-denominated securities. Since most U.S. assets will be losing value, Treasuries will be among the few which are consistently rising. This will put additional upward pressure on TLT and related holdings. There are also very few investments with so little credit risk which are yielding close to 4-1/4% annualized. If you are not a U.S. resident, then having your money in long-dated U.S. Treasuries will ensure that your wealth remains denominated in U.S. dollars at a time when nearly all other global currencies will be losing value through 2013.

Therefore, as long as TLT remains below 94 dollars per share, it is one of the best possible investment choices you can make. In the interest of full disclosure, I was a heavy buyer of TLT in the upper 80s and low 90s from December 2010 through April 2011, and continue to hold the entire position which I had accumulated. I have numerous good-until-cancelled limit orders to purchase more TLT near 93 dollars per share and below.