iBankCoin
18 years in Wall Street, left after finding out it was all horseshit. Founder/ Master and Commander: iBankCoin, finance news and commentary from the future.
Joined Nov 10, 2007
19,220 Blog Posts

Milquetoast Roaring Rally

The fuck sort of roaring rally is this — the type where shit just trades lower? I’ve hardly got gains here. Let me attempt to remedy this situation.

I delved into the Permian Basin and bought some CPE — which I expect to move next week. And for an intra-day gambool — I bought PHUN. Don’t ask. I know — huge piece of shit. Fuck off.

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9 comments

  1. ericbakerbruce

    Do you want to know what I bought?

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  2. numbersgame

    I bought more 25+ year year treasuries – stripped bonds, to be precise. Here’s how these works:
    Bond maturing in April 2047 (28 years), yileding 2.96%
    Price = $100*(1-0.0296)^28 = $43.11

    My prediction is that rates will drop dwon to 2.5% within 2 years (recession).
    Future price = $100*(1-0.025)^26 = $51.77
    -> gain of 20%

    This plan will go horribly wrong if rates don’t fall, of course. For rates not to fall, then either
    1) no recession in the next two years
    2) recession in the next two year, but rates don’t fall

    I like my odds. Keep in mind that, I’m earning 3%/year while I wait for rates to drop.

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      • numbersgame

        That’s a basic, near-risk-free investment: it’s basically a high-interest savings account. It’s apples vs oranges.

        The risk of losing money is very low compared to buying 25+ year bonds. There is also very little chance of pricipal appreciation. Longer bonds have a higher risk, but higher potential reward. You can buy 5- or 10-year bonds and split the difference.

        Let’s say that 2.5 year interest rates move from 2.5% to 3.5%
        [(1-0.035)/(1-0.025)]^2.5years = 0.9745.

        So even with a huge interest rate move, you would lose very little (and this calculation assumes that the interest rate jump occurs tomorrow). Also, this is not a *real* loss, but an *opportunity* loss: your bond would make less interest than the 3.5% bonds. Either way, you’d still be in the green.

        This is an important point: every bond will remain in the green if you hold it until maturity and it doesn’t default, no matter waht interest rates do. Obviously, the same doesn’t hold true for stocks. (In a high inflation enviroment, your bond will still gain in nominal value but lose money in purchasing power).

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      • numbersgame

        IMHO, Treasury bonds are misunderstood and thus undervalued by retail investors. They just look at the current interest rate and don’t understand how “duration” can benefit them.

        Wall Street and financial advisors aren’t goign to recommend long US bonds.
        1) They make almost no profit from clients buying US Treasuries
        2) No account churn, so profit falls even more
        3) Clients don’t value simple advice (“buy this and hold it for 2 years”), as they think the FA isn’t contributing much if their advice isn’t adapting to the market. They’d much rather invest in a machine-learning (ie, trend-follwing) fund that will blow up in their face.

        Also, proffesionals investing for themselves woudl rather time the market: hold equities until they believe the market is heading down.

        Next, find an economist who thinks that we won’t have a recession within 2 years, or that rates won’t drop during that recession (hint: the 30Yr has already hit 2.25% in 2014 and 2016).

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        • ferd

          Like I said: “FYI”. Just thought you may find it of interest that Gund does not like your thesis.

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        • numbersgame

          I read the whole piece (I just skimmed parts last time): it is nice info, but he does have one huge misperception.

          In terms of liberal policies from presidential candidates, he says they are distracting from the “real problems”, which he defines as *failing infrastructure.* Really? Only a 1% could think that. He even says later. “Also, we will likely see violence in the 2020 campaign. There will be more than just people heckling. There will be real violence, maybe even riots.” I guess he thinks that people get *really* upset over potholes?

          Now go read Ray Dalio. That is a 1%er that understands his gilded gates will not hold up if things continue at this pace, and updating our “third-world quality” airports is NOT the answer.

          As for Gundlach’s thoughts on 2yr vs 20-yr bonds:
          “The next downturn will massively expand the federal deficit. … So on natural market forces, interest rates would have to go up on long-term bonds….it’s possible that the Federal Reserve will aggressively emulate the Bank of Japan and maybe own every single treasury bond. That’s why it’s very difficult to predict where long-term interest rates are going.”
          I fully expect the FED to bail out everyone by buying bonds. Why wouldn’t they?
          1) So far, Central Bank assets purchases have had no ill effects for governements or the 1%, as consumer price infaltion is subdued and asset inflation is seen as a positive.
          2) SS, Medicare-for-All, DoD, spending will drive us off a cliff, but it will be several years before the market forces overwhelm the FED and rates take off. Europe will be canary in the coal mine. ECB will blow up before the FED, becuase the US is much more econmically sound in the very long (decades) term picture.
          4) The FED Board led by Powell doesn’t have the stomach for painful long-term solutions – just look at their rate hike about-face. They know that kicking the can (ie, buying bonds) will continue to work until they are well out of office. I’m looking forward to sellign my bonds to the FED in a year or two.

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