Someone Will Make a Lot of Money on This Market Anomaly
By Dr. Steve Sjuggerud
June 25, 2008
In the latest issue of True Wealth, I shared with subscribers "The Next Big Thing(s) – Nine ideas for a difficult market."
To me, it's exciting to be able to have that many unique opportunities to share. That's the biggest unseen benefit of the rough market we've had over the last 12 months.
The nine ideas I shared come from all over the globe, in all kinds of investments (stocks, bonds, and whatever else). So they're not all correlated... If one doesn't work, another will more than make up for it.
And I believe a few of those ideas will turn out to be "life changing" investments. The opportunities are that good. Most of them are "once in a generation" trades.
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Today, I want to share with you yet another possible once-in-a-generation opportunity...
Right now, "investment grade" corporate bonds are as cheap as they've ever been, relative to Treasury bonds.
The only time we saw a similar anomaly in the last 50 years was in October 2002. It was a great buy signal...
In less than eight months, "boring" investment-grade bonds soared 19% in price. And don't forget, the bonds were paying more than 7% (compared to just 4% in Treasury bonds)... So you'd have picked up a good amount of interest in addition to your capital gains.
Today, we're seeing a nearly identical situation... Investment-grade corporate bonds are paying more than 7%, while Treasury bonds are paying around 4%. Take a look at the chart and you'll see what I mean:
Traditionally, investment-grade bonds have paid out only 25% more interest than Treasury bonds. So, for example, if Treasury bonds are paying 4% interest, then investment-grade corporate bonds would typically pay out only 5% interest.
The difference between 4% and 5% isn't huge... Treasury bonds are thought of as the ultimate safe investment. But investment-grade bonds are not usually considered particularly risky either.
Today, however, investors are spooked. So now, investment-grade corporate bonds once again pay out more than 7% interest... nearly twice what Treasuries pay.
This relationship could return to normal in two ways... Corporate-bond prices could soar, or Treasury prices could fall. Last time around (in late 2002 to mid 2003), both of these happened at the same time.
This relationship will likely return to "normal" again – and someone will make a lot of money.
The easiest way to buy a basket of investment-grade corporate bonds is through the iShares Investment Grade Corporate Bond Fund (LQD). It generally holds a basket of 100 different investment-grade corporate bonds.
But I'm not that bold... LQD has been hitting new lows daily. And we can't know in advance how the relationship will return to normal (if corporate bonds will soar or if Treasuries will crash).
There's another way to put the trade on... You could do it hedge-fund style, where you buy LQD and make the equal and opposite bet against Treasuries. One way to bet against Treasuries is through the ProFunds Rising Rates 10 (RTPIX), which will profit if Treasury prices fall.
Again, I'm not bold enough for these trades yet. The trends are against me so far. And with all the turmoil in anything related to borrowing money, I can't recommend getting in right now.
But it is an extraordinary anomaly... one we should only see once in a generation. Soon, we will have a safer moment to capitalize on it. Someday, someone will make a lot of money here. We'll do our best to pick the right time to get in...
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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WHY YOUR MONEY SHOULD BE IN CANADA
More proof of how well the ABC theory of commodity investment works… the $2,400 difference.
If you had placed $10,000 into the benchmark U.S. exchange-traded fund (SPY) one year ago, you'd have lost about $1,100 by now. If you had placed that money into the benchmark Canadian ETF (EWC), you'd be up about $1,400.
Why has Canada done so well versus the U.S.? Easy. The Canadian stock market is heavily weighted toward base metals, precious metals, energy, crude oil, natural gas, and agriculture. These sectors have a tremendous tailwind behind them. The U.S. market has a lot of exposure to banking and consumer spending. These sectors face a tremendous headwind.
Canada is home to the world's safest large oil deposit. It's the world's largest uranium producer. It's the world's largest fertilizer producer. It's also a giant in gold, nickel, timber, and wheat production… and a safe ride on the rails gets it all to the world's top commodity consumer. As you can see, it's a steady uptrend for the "C" of the ABCs.
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California's first drought since 1992 has pinched the spigot for farmers in the largest U.S. agricultural area. Along the western edge of the San Joaquin Valley, water supply has been reduced by about 50 percent, leading farmers to abandon crops and spend millions of dollars on short-term solutions.
The drought has pushed water prices on the open market to about $1,000 per acre-foot, or 10 times the amount charged by the U.S. Bureau of Reclamation, Woolf said. An acre-foot of water is equivalent to about 326,000 gallons, or as much as one to two families use in a year.
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The extent of Australia's minerals boom was underlined on Monday when its official forecasting agency predicted export earnings from commodities would achieve the biggest annual rise in four decades in 2008-09, hitting a record.
The Australian Bureau of Agricultural and Resource Economics forecast the value of the country's commodity exports would rise 40 per cent to A$212bn (US$202bn) in the financial year to June 2009, led by a 48 per cent surge in mineral exports to A$178bn.
If these figures are achieved, commodity exports will have more than doubled in value terms since 2003-04 when the current commodity supercycle started.
While the sharp rises in oil and food prices are firmly on the global agenda, Abare predicted that world prices for metallurgical coal would be three times higher in 2008-09 compared with this year.
Abare said the value of Australia's exports of iron ore, the other main ingredient in steelmaking, will rise by 72 per cent in the coming year, mainly because of price rather than volume increases.
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– Financial Times |
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