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GROUCHO MARX FAMOUSLY SAID he wouldn't want to be a member of any club that would have him. Based on that principle, when the crowd starts saying positive things about Treasuries, I get worried.
I should first confess that I've been working from home for the better part of the past couple of weeks, which has meant I've been watching more financial television than usual. That, I suspect, may be warping my perceptions.
In any case, I was taken aback by some comments on the tube about the attractiveness of U.S. Treasury securities after the yield on the benchmark 10-year note fell below 3%. Understand that Treasuries had been the object of universal derision among the investment cogniscenti, sort of the equivalent of minivans among auto enthusiasts.
Yet somehow these minivans have been lapping the hottest sports cars. In round terms, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (TLT), is up more than 10% since April while the PowerShares QQQ ETF (QQQQ) that tracks the Nasdaq 100 is down more than 10%. Call it revenge of the nerds.
This hasn't been a short-term phenomenon. As Robert Kessler, head of the eponymously named Kessler Investment Advisors of Denver, points out, "perpetually maligned" 10-year Treasury zero-coupon STRIPS have outperformed both stocks (using the Standard & Poor's 500) and commodities (as measured by the GSCI total return index) over the past three, five, 10, 15 and 20 years.
Bull markets in bonds, Kessler continues, last as long as 37 years. Yields peaked some 28 years ago in 1982, so they can continue to decline. Even at this relatively advanced stage of the Treasury bull market, he also points out that U.S. households' allocations to Treasuries is just 1.7%, compared to 4.6% in 1994 and 8.1% in 1952. That doesn't take into account proxies such as ETFs such as TLT, but the underweighting of Treasuries makes suggestion of a bubble less than credible.
Most active investors have missed the rally that has brought the yield on the Treasury 30-year long bond down from 5% before Easter to under 4% ahead of the July 4th holiday. What's even less well understood is the implications of the bond math of that advance. It's a bigger percentage move than what's remembered as the greatest bond rally in history, when yields fell from 14% to under 10% in the early 1980s. In price terms, the recent gain has been over 20% on long-term STRIPS -- during a period that deep thinkers about concepts such as black swans asserted that everybody should short Treasuries.
But now that the two-year note yield dropped to a record low under 0.6% -- even below the crisis lows following Lehman's collapse in late 2008 -- or the three-year note is under 1% or the five-year note is under 2%, the wisdom of owning Treasuries is being appreciated even by talking heads on cable TV.
Which is what makes me uncomfortable. Intel (INTC) yields 3.10%, more than the 10-year Treasury and is arguably the most important tech company in the world. If there were no Apple, life would go on without its lovely gadgets. Without Intel microprocessors, personal computers -- including Macs -- couldn't function.
Microsoft (MSFT) yields more than the five-year Treasury at 2.1o%. And most of Corporate America uses Windows and Office, the programs that produce massive free cash flow to Microsoft investors.
So, the question is why own Treasuries when Blue Chips such as Intel and Microsoft yield more? Simply because those stocks lost 3% and 4%, respectively, in Tuesday's rout. Other Dow stocks such as ExxonMobil (MOB) and Altria (MO) also lost 2% even though they handily outyield Treasuries.
Market psychology is being dominated by another dictum of one of Groucho's contemporaries, Will Rogers. The homespun philosopher said in the 1930s that return of capital was more important than return on capital.
This is more than a quarter-end phenomenon, although the calendar clearly is exaggerating the market's swings. The decline in all risk assets, notably commodities along with equities, points to economic weakness and, perhaps, outright contraction. That would suggest lower stock prices and Treasury yields in the near term.
Over the next 10 years, I would rather own stocks of great American multinational companies that create wealth rather than the debt of the U.S. government, which absorbs wealth. Over the next 10 months, I'm not so sure. And on that score, I'm afraid I have too much company. Even so, I'd rather protect principal for now in order to have the cash to buy these great companies later at bargain prices.
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