The Barnard Observer

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Home  Vault  Misc  Contact                               c2003-10 Thomas Barnard

Bonds: No Where to Go But Down 

    The insurmountable problem for bonds is that yields are at the bottom of an almost thirty year move down.  For retirees it's disaster.  They chase a tiny yield, and then when yields go up, they'll lose money on their principal.  Yields are smaller still on money markets.  The only reasonable strategy would be to buy yields a year or two or three out, so that you can rotate out, and not get skinned alive when yields go up.

    A government hell-bent on spending to shore up the economy together an increase in entitlements will probably tax the limits of the bond market.  Human beings being what they are, nothing will happen until a crisis is reached.   

    Here is a listing of the U.S. Government ten year bond yields going back to the peak in 1981, which pulled off the Federal Reserve's website (http://www.federalreserve.gov/releases/h15/data.htm).:

1981, 13.92%
1982, 13.01
1983, 11.10
1984, 12.46
1985, 10.62
1986, 7.67
1987, 8.39
1988, 8.85
1989, 8.49
1990, 8.55
1991, 7.86
1992, 7.01
1993, 5.87
1994, 7.09
1995, 6.57
1996, 6.44
1997, 6.35
1998, 5.26
1999, 5.65
2000, 6.03
2001, 5.02
2002, 4.61
2003, 4.01
2004, 4.27
2005, 4.29
2006, 4.80
2007, 4.63
2008, 3.66
2009, 3.26%

    I am only asking that you look at the list.  Rates, which peaked in 1981, have been in a persistent downtrend for the past 30 years.  Yes, rates may go to zero, but odds are that Obama's social agenda will eventually be seen in a more and more in an unhappy, inflationary light.  But it may only be when the dilemma of the states' defined benefit disaster comes to light and they come to the federal government for a bail out that the bond market may finally force interest rates back up.  Everyone who owns bonds at that point will see the rates go up, and their bond principal go down.

    Allen Greenspan, who was in favor of the tax cuts when they were instituted earlier in the decade, now feels prudence dictates they be allowed to expire, as they increase deficits and weaken out ability to borrow (which ultimately means higher interest rates, lower principal amounts).  The failure of government to allow taxes to increase may push rates higher.

    Critical viewing:  http://www.youtube.com/watch?v=FbTgL70OGD0  Your duty as a citizen.

    After viewing Greenspan's remarks it seems to me most of the risk is against bonds, especially since there has been such a mad dash to buy them.  My advice is withdraw these funds now.  I don't think I would wait.  There is an alternative strategy, which would be to buy individual bonds which have short expirations.  Own the bond to expiration, the vagaries of the bond principal pricing will not affect you.

    Stay away from bond mutual funds, they will most certainly take a hit when interest rates go up.  Until bonds make their next yield peak, whenever that will be, you will want to vary your  fixed maturities so that your need for cash does not require you to sell anything before maturity, because that may cost you.

Think About Stocks.  It may be no accident that stocks jumped on Friday.  Bond investors will have to put their money somewhere, and some of it may well end up in stocks.  I still like Citigroup (C) for the long term.  The government will be out of the stock before the end of the year, and without this persistent selling, it is likely to start to move forward.  Gold may well continue in its upward bubble until Congress shows that it has the backbone to raise taxes and cut spending, though I would be careful about gold.  Deflationary housing costs may spill over and pop the bubble.

    I would advocate small amounts in speculate vehicles, the like of which I am touting below. 

    I feel a serious reorganization needs to be accomplished on local, state and federal levels, but that I'm leaving to separate page:  Soap box stuff.

September 27, 2010

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Sponsors

I'm still big game hunting.  I'm only interested in game changers and truly unusual opportunities.  My father has told me many times that what made the difference in his stock market investments were the elephants, the stocks that went up multiple times.  Much harder to pick those now than 15 years ago when all you had to do was mention the internet.  And you better believe it, I'm saving my best ideas for my partners. 

Stock Recommendation Partnerships.  Presently, I have two such recommendations.  These are stocks I just can't get enough of for my own account.  You own the stock in your account, but a percentage of the winnings go to Thomas Barnard for his recommendations. 

Here is the agreement:  Stock Recommendation Partnership Agreement.  (No agreement no matter how well drawn is sufficient.  If I don't know you personally, don't bother.  If I do know you, now is a good time to check this out.)

My pretties are doing just fine in this environment.  Update:  These are stocks of unusual potential.  But the risk is always bigger with nascent companies.  One of the stocks has run-up more than 200% since February, in the same time period the other one has gone down 15%.  Never mind, I love them both still.  The one that has gone up, has only just begun to go up.  The one that has gone down might be one the biggest things since Microsoft (if it doesn't get gobbled up).  There is so much compression, these both have a long way to go on the upside.

Email: tbbarnard@yahoo.com

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