How to Make 53% Front-Running the Government
By Tom Dyson
Monday, June 15, 2009
Front-running is illegal.
Here's how it works: A crooked broker receives a large order from a customer. Before he executes the customer's order, he'll buy the stock in his own account. The customer's order pushes the price of the stock up and gives him an easy profit.
Today, I'm going to show you how to "front-run" the U.S. government. This trade is not illegal. The information we'll use is public, not "inside" information. But the profits are just as easy...
As I showed you in an essay last week, the Treasury sells around $165 billion bonds each month to pay for the government's spending plans. It auctions these bonds on Tuesdays, Wednesdays, and Thursdays in the second and fourth weeks of the month. In that essay, I showed you how to trade these auctions each month. Today, I've got a slightly different twist, which I think will end up being more profitable...
To make money, all you have to do is front-run the Treasury's sales of bonds. In other words, you sell short bonds just before the auctions begin on Tuesday, and then cover your short after the last auction on Thursday. Repeat every two weeks.
Normally, strategies like this don't work in the financial markets. Traders mark down prices in advance of the auctions, so there's no benefit to front-runners. But in this case, my guess is, the Treasury's auctions are so large, they are bludgeoning the market lower, despite the traders' moves.
Take the most recent "front-running" trade as an example. Between Tuesday, June 9, and Thursday, June 11, the Treasury auctioned $65 billion in three-year, 10-year, and 30-year bonds.
The UltraShort 20+ Year Treasury ProShares (TBT) is the ETF that rises when bonds fall in price. It opened at $56.58 on the morning of the first auction and closed at $57.72 the evening of the last auction. Government front-runners made 2% in three days.
You could have put on this trade 12 times in the past six months, and you would have profited eight times... with an average gain of 1.8% per trade and an average three-day holding period.
| Front-Running the Government |
|
Entry Date
|
Entry Price
|
Exit Date
|
Exit Price
|
Gain
|
Days Held
|
|
Dec 22, 08
|
$36.23
|
Dec 23, 08
|
$36.62
|
1.1%
|
2
|
|
Jan 6, 09
|
$42.61
|
Jan 8, 09
|
$41.73
|
-2.1%
|
3
|
|
Jan 26, 09
|
$45.01
|
Jan 29, 09
|
$47.79
|
6.2%
|
4
|
|
Feb 10, 09
|
$47.10
|
Feb 12, 09
|
$45.96
|
-2.4%
|
3
|
|
Feb 24, 09
|
$45.00
|
Feb 26, 09
|
$47.62
|
5.8%
|
3
|
|
Mar 10, 09
|
$46.85
|
Mar 12, 09
|
$46.19
|
-1.4%
|
3
|
|
Mar 24, 09
|
$46.47
|
Mar 26, 09
|
$45.20
|
-2.7%
|
3
|
|
Apr 7, 09
|
$45.73
|
Apr 9, 09
|
$45.75
|
0.0%
|
3
|
|
Apr 27, 09
|
$46.71
|
Apr 29, 09
|
$48.90
|
4.7%
|
3
|
|
May 5, 09
|
$49.75
|
May 7, 09
|
$52.41
|
5.3%
|
3
|
|
May 26, 09
|
$53.08
|
May 28, 09
|
$55.77
|
5.1%
|
3
|
|
Jun 9, 09
|
$56.58
|
Jun 11, 09
|
$57.72
|
2.0%
|
3
|
| |
|
Average Gain |
1.8% |
|
| Buy TBT at the open price on Tuesday and sell at the closing price on Thursday, auction weeks only. |
It may not sound like much, but compounding your money at 1.8% every two weeks turns every $1,000 you invest into $1,530 in one year. That's a 50% gain with just a handful of tiny trades. And with leverage, the gains would be even greater.
This week, there are no Treasury auctions... and TBT is falling. The next auctions are next week, starting Tuesday. To front-run the government, buy TBT first thing on Tuesday morning June 23 and then cover your position late on Thursday evening. Repeat every two weeks.
Good investing,
Tom
P.S. Click here for a link to the schedule of government bond auctions. |
NEW HIGHS OF NOTE LAST WEEK
ArQule (ARQL)... biotech
Insmed (INSM)... biotech
MannKind (MNKD)... biotech
BioDelivery (BDSI)... biotech
Keryx (KERX)... pharma
NeurogesX (NGSX)... pharma
Teva (TEVA)... generic drugs
ICU Medical (ICUI)... medical devices
Exact Sciences (EXAS)... cancer detection
Caribou Coffee (CBOU)... coffee
P.F. Chang's (PFCB)... restaurants
Sanderson Farms (SAFM)... Big Chicken
Synaptics (SYNA)... mobile computing
Sunoco Logistics (SXL)... pipelines
URS Corp (URS)... infrastructure
MYR Group (MYRG)... infrastructure
Rubicon Minerals (RBY)... gold stock
Lumber Liquidators (LL)... lumber products
NEW LOWS OF NOTE LAST WEEK
Cattle ETF (COW)... a downtrend in beef |
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Prices rose across the board on Thursday as gains for oil, metals and agricultural raw materials pushed the S&P GSCI commodities index to its highest in nearly eight months.
The spot S&P GSCI, the benchmark of the asset class, hit 478.2 points, up more than 37 per cent since the start of the year, attracting more investors' money into commodities funds.
Crude oil continued its sharp rebound, approaching $73 a barrel for the first time in seven-and-a-half months as the International Energy Agency, the western countries' oil watchdog, said the recent price rally was in part justified by oil market fundamentals.
– Financial Times
Gasoline prices are blowing past recent estimates, saddling consumers with higher costs just as the summer driving season shifts into high gear.
Pump prices are following the rise in crude oil, which set an 8-month high Thursday on a falling dollar and brighter economic outlook.
Don't blame the corner gas station. Oil is pulling gas prices higher. Crude for July delivery settled at $72.68 Thursday, up $1.35, or nearly 2%.
Analysts say investors have been piling into crude as an alternative to a falling dollar. The economic stimulus and Wall Street bailout are helping push the deficit past $2 trillion this fiscal year, igniting fears of a weaker dollar and inflation.
– USA Today
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If you do just one thing today, make sure to read this interview.
Maria Bartiromo just interviewed legendary investor Jim Rogers. There are several great observations: Freddie Mac makes Enron's accounting look honest... Obama is clueless... let everyone go bankrupt... get long agriculture. |
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