Your Portfolio Is Loaded with Junk
By Jeff Clark
November 10, 2009
That's right... JUNK.
And it's not just your portfolio. Your neighbors' portfolios are loaded with junk, too. So are your parents', and your kids', and your grandkids'. Heck, if you've got 'em, even your great great grandkids own a big old pile-o-junk.
No. You didn't put it there. You spend a great deal of time researching your investments. You know how to separate the good ideas from the bad, and there is no way you would ever, EVER, buy a bunch of garbage.
But the U.S. government would. And it's used your tax money to do it.
Actually, that's not quite right. The government spent your tax money a long time ago. It's now using your great great grandkids' future tax money to buy the junk.
I'm referring, of course, to the Treasury's purchase of Mortgage Backed Securities (MBS) – those same securities that threatened to topple the nation's financial system a few short months ago.
The government has been buying up huge amounts of MBS for several months now. And if the recent Federal Open Market Committee statement is to be believed, it'll continue to buy this junk through March of next year – an additional $150 billion worth.
As a result of this quasi-permanent bid beneath the market, Fannie Mae MBS – that is, debt issued by a technically bankrupt company – now trades with roughly the same yield as U.S. Treasury securities of similar maturities.
In other words, you can buy a 10-year Treasury note – backed by the full faith and credit of the United States Treasury – for a 3.5% yield. Or you can buy a 10-year Fannie Mae MBS – backed by a pool of mortgages on homes that may be worth only a fraction of their original value – for a 3.5% yield.
Whether you know it or not, you're buying the Fannie Mae notes – or rather, the government is buying them for you.
This is utter insanity. Surely, the Fannie Mae notes are not of the same high credit quality of U.S. Treasury obligations. So they certainly ought not be priced for the same yield.
Then again, maybe that's the wrong way to look at it. Maybe the U.S. Treasury notes have declined to the same low-quality rating of Fannie Mae MBS.
Ah, yes. Now it's beginning to make sense.
For quite some time now, I've been toying with the idea of short selling U.S. government bonds. I haven't pulled the trigger on the trade because of the Fed's commitment to keep interest rates as low as possible for as long as possible. Now, though, with the Treasury paying premium prices to buy up pieces of junk, the day of reckoning is drawing near.
The easiest way to short Treasury bonds is by buying the ProShares UltraShort 20+ year Treasury ETF (TBT). This fund trades inverse to the Treasury bond market. So when Treasury prices rally, TBT falls. When Treasury prices fall, TBT rises.
It's still a bit too early to put this trade on. But we're getting close.
I'll let you know when the time is right.
Best regards and good trading,
Jeff Clark |
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Last |
Change |
52-Wk |
| S&P 500 |
1097.91 |
+0.94% |
+16.73% |
| Oil (USO) |
40.76 |
+0.77% |
-31.35% |
| Gold (GLD) |
104.23 |
+1.02% |
+35.00% |
| Silver (SLV) |
14.44 |
+1.51% |
+88.95% |
| U.S. Dollar |
75.28 |
-0.01% |
-9.39% |
| Euro |
1.50 |
+0.11% |
+12.20% |
| VIX |
21.49 |
+0.28% |
-69.44% |
| HUI |
448.69 |
+0.60% |
+120.38% |
| 10-Year Yield |
3.40% |
-0.02 |
-0.47 |
|
|
| Company |
Sym |
Industry |
Novartis |
NVS |
Big Pharma |
Amazon |
AMZN |
online shopping |
Alcon |
ACL |
medical devices |
Emerson Electric |
EMR |
electrical equip |
Costco |
COST |
shopping club |
Dominion Res |
D |
utilities |
HDFC Bank |
HDB |
bank |
Portugal Tele |
PT |
wireless telecom |
NetApp |
NTAP |
data storage |
Petrobras |
PBR |
Big Oil |
Hewlett-Packard |
HPQ |
computers |
American Express |
AXP |
credit cards |
MasterCard |
MA |
credit cards |
Canadian Natl Rail |
CNI |
railroad |
ADP |
ADP |
payroll |
McKesson |
MCK |
hospital supplies |
Vivo Parti |
VIV |
wireless telecom |
Estee Lauder |
EL |
make-up |
Google |
GOOG |
online search |
Visa |
V |
credit cards |
Barrick Gold |
ABX |
gold mining |
Travelers |
TRV |
insurance |
Syngenta |
SYT |
fertilizer |
Kellogg |
K |
cereal |
HJ Heinz |
HNZ |
packaged foods |
Eaton |
ETN |
electrical equip |
Dish Network |
DISH |
satellite TV |
BP |
BP |
Big Oil |
Itau Unibanco |
ITUB |
bank |
Diageo |
DEO |
liquor |
Goldcorp |
GG |
gold mining |
Newmont Mining |
NEM |
gold mining |
Archer Daniel |
ADM |
agriculture |
Northrop Grumman |
NOC |
Big Defense |
Quest |
DGX |
medical research |
Life Technologies |
LIFE |
biotech |
Vale |
VALE |
steel |
McDonald's |
MCD |
fast food |
Colgate-Palmolive |
CL |
personal products |
Accenture |
ACN |
consulting |
Tenaris |
TS |
steel |
Viacom |
VIA |
TV programming |
Cognizant |
CTSH |
outsourcing |
Shire |
SHPGY |
pharma |
Yanzhou Coal |
YZC |
mineral mining |
China Life |
LFC |
insurance |
United Tech |
UTX |
conglomerate |
Altria Group |
MO |
cigarettes |
Halliburton |
HAL |
oil & gas svcs |
Express Scripts |
ESRX |
pharmacy mgmt |
Adobe Systems |
ADBE |
software |
Grupo Televisa |
TV |
TV programming |
Centurytel |
CTL |
telecom |
|
| Company |
Sym |
Industry |
Myriad Genetics |
MYGN |
diagnostics |
Apollo Group |
APOL |
for-profit edu |
Vitacost |
VITC |
mail order |
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