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Are Treasury Bonds a Safe Haven Again?

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    September 30, 2013

    Investors panicked out of bonds after Fed Chairman Bernanke suggested in May that the Fed could begin tapering back its QE bond-buying.

    But last week marked the third straight week for declining yields (higher prices) for U.S. Treasury bonds.

    And the money flow and momentum reversal is showing up in the charts. The I Shares 20-year T’Bond TLT has been rallying off a rising double-bottom, and broke out above the previous resistance at its 30-day m.a. for the first time since Bernanke’s remarks in May.


    Matthew Hornbach, Morgan Stanley interest rate strategist, had this to say about it in a note to clients: “Read my Lips: Buy bonds. Fading the Treasury bond market would not be prudent at this juncture, given risks to the economic outlook in coming weeks. . . . . Buy 5-year and 10-year Treasuries.”

    To read my weekend newspaper column click here:  Everything Still Looks Bullish – In The Rear-View Mirror

    Other Voices:


    A number of well-known names are joining Buffett, Icahn, and Druckenmiller, in expressing concerns.

    Joseph Baratta, Blackstone Group, global head of private equity: “We’re in the middle of an epic credit bubble, in my opinion, the likes of which I haven’t seen in my career. . . . . valuations we have to pay relative to the growth prospects are out of whack.

    Byron Wein, senior advisor to Blackstone: “Be defensive when most others think almost everything is headed in the right direction. . . . . Looking at the sentiment data and reports of institutional pools in the U.S. and Europe, it is clear there is a widespread view that the world economy is improving and stocks are headed higher. This makes the market vulnerable to a shock of some kind. I have reflected on where that could come from, and continue to believe earnings in the U.S. will be disappointing. Profit margins are at a high and rising interest rates and other cost pressures should begin to show up in third quarter reports. More than three-quarters of companies providing guidance are encouraging analysts to adjust their earnings estimates lower.”

    Tom McClellan, editor McClellan Financial Publications: “Seasonal patterns; One big problem is that September is supposed to be a weak month, but there was a huge spike upward to a top Sep. 18, caused by both the anticipation of the FOMC’s actions and the response to the decision not to “taper” back from the $85 billion a month of extra stimulus. That action and the market’s response could be viewed in at least a couple of different ways. The first is that the Fed’s stimulus may have altered the normal course of the river, with all of that extra money changing things in a fundamental way.

    But a second way of looking at this is that the market’s anticipation and response to the Fed’s action took prices well off track, and that the market’s mission is to get back on track. The further that prices wander off track, the harder they have to work to get back on track.

    In simpler terms, the stock market went up when it was supposed to go down, and now it must pay the price for wandering off course. That was certainly the case in 1987, when the market went above its normal track in the summer, and had to work extra hard in October 1987 to get back on the path.

    The seasonal weak period does not end until late October. That’s the old saw about “sell in May and go away” (and then come back in November, which is not as poetic and so it gets left out of the old saying). So in other words, the stock market still has until late October, on average, to finish getting itself back on track with what it is supposed to be doing during the normal seasonal weakness period.”

    Comstock Partners: “One of the bulls’ major reasons for being optimistic on the stock market is their view that stocks are reasonably valued at 14 to 15 times estimated forward-looking earnings. They consistently state this view on financial TV shows and in print without ever being challenged by their interviewers. We believe they are using a flawed model that would not have had predictive value in the past, and that the bears will prove to be correct. . . . . . . Simply put, the bears use actual trailing earnings, which are at the high end of historical valuations. . . . ‘Estimates’ of year-ahead earnings are notoriously unreliable. In the last 28 years, estimates have been too high 76% of the time. . . . . In our view, the market is selling at 19.7 times cyclically-smoothed reported earnings, about 31% higher than the historical average of 15, let alone the average multiple of 7 to 10 times earnings seen at the bottom of a number of past bear markets.”

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    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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