It’s Time To Short Tresuries With Inverse ETF’s

Today is a day to give thanks.

I know it’s a little early for Thanksgiving, but I’m talking about being thankful to Uncle Sam and the U.S. government for the bountiful opportunity they have given us to make huge loads of money in a relatively short amount of time.

I’m talking about shorting U.S. debt via 2 specific, but very risky vehicles:

• Ultrashort Lehman 20+Year Treasury Proshares (TBT)
• Direxion Daily 30 Year Treasury Bear 3X Shares (TMV)

Thank You Mr. President

Since the collapse of the yield curve late last year when people were panicked in the market such that they were willing to take NEGATIVE returns on their money via U.S. Treasuries to ensure some type of safety, things are starting to normalize now, and in fact swing the other way.

This has given us one of the biggest opportunities in the last 50 years to take advantage of a punch drunk bumbling and stumbling government spending itself into possible oblivion.

A little harsh you say?

Perhaps, and I’m not one to judge, but I am certain of one thing: As Warren Buffett recently stated, the bubble in U.S. Treasuries is one of the largest of all time, even bigger than the housing bubble that we just witnessed collapse.

In fact, Buffett highlighted the sale in late 2008 by Berkshire Hathaway of a Treasury bill for a negative yield.

Buffett wrote in Berkshire’s annual letter in February that when “the financial history of this decade is written…the Treasury-bond bubble of late 2008″ may rank up there with the housing bubble of the early to middle part of the decade.

What The Heck Are You Talking About?

For those that are uninitiated, I’ll break it down in simple terms:

The U.S. government is printing money.

They are doing this to help stave off an apparent collapse in the banking sector, add liquidity to the market, AND prop up the U.S. economy with various stimulus packages.

How do you come up with money that you don’t have?

You borrow.

So how does the U.S. government borrow?

They issue Treasuries dated in different maturities ranging from 1-30 years.

Who buys this debt?

All sorts of folks from around the world, but mostly our neighbors to the East, China, Japan, and other countries.

What terms does the government have to offer them to take on ever increasing amounts of our debt?

Well, not too long ago, those terms were rather modest, and were akin to basically borrowing money for free, with yields going down below 3% for the 30 year notes in late 2008, and far lower yields for shorter maturities, it was a no brainer to take on more debt when being able to pay it back at such favorable terms.

That however, is now changing with Treasuries declining about 20% from those highs, and the yield now over 4% and climbing fast.

What happens when lenders, or buyers, don’t want any more debt?

We have to increase the payout they get for taking on more debt, thus lowering Treasury prices, and increasing the yield, since they work inverse of each other.

OK, I Get It, So What’s The Big Deal?

There are several reasons why it’s time to buy either of the 2 ETF’s that I am recommending now: the Ultrashort Lehman 20+Year Treasury Proshares (TBT), or the Direxion Daily 30 Year Treasury Bear 3X Shares (TMV).

Here’s some of those reasons in no particular order:

• Yields are still low by historical measures, meaning we have a long way to go before we are “tapped out”. With room to run, the government isn’t nearly finished yet applying for and getting more money from outside sources or printing their own.
• The threat of DEFLATION has lessened or disappeared entirely, and now folks are concerned with INFLATION again with rising prices for energy, commodities, and other items, despite the global recession.

This is bad news for our money, as it becomes less valuable, and you guessed it, in order to garner more buyers for our debt, we have to increase the yield being paid out, lowering Treasury prices further.

While holders of Treasuries ultimately will get their money back, prices could fall sharply in the interim, and repayment could be in greatly depreciated dollars.

• The massive federal stimulus program ultimately may lead to much higher inflation. Again, higher prices because we are artificially increasing the money supply, and making our currency worth less.
• The government’s efforts to prop up the yield are proving unsuccessful. The U.S. government has been trying its hardest to prop up Treasury prices and the yield by buying them up, but it is no longer working, as prices continue to fall, and yields continue to increase despite their best efforts.

Look for this to not only continue but worsen as the slippery slope of higher yields leads debt buyers to demand even higher rates of return for taking on higher amounts of risk

• There is some scuttlebutt out there that the U.S.’s credit rating is under review and might be downgraded from its sterling AAA rating. If this happened, it would send imminent shockwaves through the Treasury market, as U.S. debt would all of a sudden become riskier, and yep, cause investors buying our debt to demand even higher yields, pushing down Treasury prices further.
• Recent offerings showing weakened demand. The U.S. has had a busy week of auctioning Treasuries this week and demand has not been that great, with a huge decline in Treasury prices today, and I expect much more tomorrow and in the coming weeks and months as the government floods the market with Treasuries that borrowers simply cannot absorb, don’t want, or will demand significantly higher terms to take on.
• The U.S. dollar is losing value quickly. In order to prop up our currency, the U.S. government will have to raise interest rates inevitably because it will make our currency stronger, so yep, it means that Treasury prices will decline and yields spike.

On the flip side, if the U.S. dollar declines in value further, and the government doesn’t raise interest rates, well guess what? Treasuries STILL fall in value along with the declining dollar.

It’s almost a no lose situation for an investment SHORTING Treasuries, and thus my recommendation for buying one of the two vehicles mentioned: the Ultrashort Lehman 20+Year Treasury Proshares (TBT), or the Direxion Daily 30 Year Treasury Bear 3X Shares (TMV).

So now what do we do?

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Comment by tinman

2009-05-29 15:33:03

Well, today’s move should serve to point out that Timing Really IS Everything. TBT is down almost 6% and TMV over 9%. Moves of this magnitude are not sufficiently explained by the casual “auction cycle” story.

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Comment by Chris Fernandez

2009-05-29 20:17:59

Hey Tinman,

Late, early, for short term traders, we’re all right!

I was focusing on the long term strategy, and for that, it might be prudent to look into a direct 1-1 ETF, or short the yield of the Treasuries, 1-1 rather than leverage it, so that even if this move takes a long time, we can wait it out without worrying about the volatility from week to week.

I don’t think it’s too late at all, long term, just too late for those that didn’t get in early this week to ride the TMV/TBT up, and get out before the collapse.

For real time trades, make sure you ,a href=”http://twitter.com/PeakStocks”> follow me on Twitter

And read more on my website devoted to small and micro cap stocks

Chris

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Comment by FokusLop

2009-05-30 01:52:16

Good article, Thanks. my name Philip.

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Comment by jay smith

2009-06-01 20:41:54

You seriously writing this about 4 months too late..lol. Anyone who reads this guys article needs to really look at the charts. this trade was recommended months ago by many astute traders such as myself.. let me guess when appl hits 200 you will say buy it . buy it now! ARE YOU JIM CRAZY CRAMER”S son!?

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Comment by Chris Fernandez

2009-06-01 21:53:37

Hey Jay,

Hmm…how bout that 20% gain since I recommended purchase?

Not too shabby huh?

Late, early, doesnt matter, still a long way to go..don’t feel bad because you didn’t get the recognition for your efforts.

We still love ya!

Chris

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