Fixed Income Investments:
Why I’m Running From Them

The flock, often referred to investing terms as the herd, is running again to U.S. Treasuries. And Michael doesn't believe it’s the place to be anymore. Find out why.If there is one thing, one take-home message, I hope my readers derive from my writings, it is to simply avoid the flock.

The flock, often referred to investing terms as the herd, is running again to U.S. Treasuries. And I don’t believe it’s the place to be anymore.

Yesterday, the U.S. government did a small offering of $35.0 billion of five-year U.S. Treasuries. The demand for them was so great that the yields on the five-year Treasuries fell to their lowest level of 2011: 1.81%. Demand for these notes outstripped supply by (a “ridiculous,” in my mind) 3.2 times.

According to a survey by Bloomberg, the yield on 10-year U.S. Treasuries will rise to 3.84% by the end of this year from their present 3.14%. I’m predicting the yields will be higher at year-end, closer to four percent. Of course, when yields rise, the prices of bonds fall.

So why the run to U.S. Treasuries again? When in fear, the flock has always run to the security of U.S. bonds. But I believe this attitude will change, and I don’t want my readers left behind.

The long-term structural problems of the U.S. will not magically disappear. We’re headed to national debt of $20.0 trillion by the end of this decade. Despite the flood gate of easy money the Fed has unleashed upon America, the economy is struggling to find solid ground.

Then we have the inflation problem no one in Washington is talking about. A news story hitting the wire yesterday said food-price inflation will come in much higher this year than the government is predicting. Fast-food chain McDonald’s expects food prices to rise 4.5% in 2011. Other food chains and grocers have already increased prices.

And let’s not forget the price of gold. In the past, when investors ran to the security of U.S. Treasuries, gold would usually fall in price. These days, the more demand for U.S. Treasuries, the higher the price for gold bullion…a new and strange phenomenon. The price of gold is an indication, among other things, that inflation will be a problem.

Going back to those U.S. Treasuries…I’m avoiding the flock.

Michael’s Personal Notes:

Ouch… that must hurt.

Wednesday, the Federal Housing Finance Agency (FHFA) in Washington reported U.S. home prices fell 5.5% in the first quarter of 2011 compared to the first quarter of 2010.

The agency bases its statistics on homes with mortgages backed by either Freddie Mac or Fannie Mae. According to the FHFA, prices for U.S. homes have now dropped for 15 straight quarters.

The situation in the U.S. housing market continues to erode. Aside from the millions of homes already foreclosed upon by lenders, depending on whose report you believe, between five million and seven million mortgages were either in the foreclosure process or delinquent last month.

One of the most common questions I hear from investors is, “Michael, when should I jump in and buy those homebuilding stocks?” Yes, U.S. homebuilder stocks have been devastated. They are still down 80% from their high (according to the Dow Jones U.S. Home Construction Index).

While I’m a big believer in “buy low, sell high,” I don’t see these stocks recovering for years. The inventory of resale and foreclosed-upon homes is just too great for sales to increase for the large American new-home builders.

Where the Market Stands; Where it’s Headed:

I’m noticing growth in corporate profits coming in at a slower pace than they did late last year. Yes, it will be a good year for corporate profits, but not a banner year. The economy is far from booming. I believe the big jump in corporate profits is behind us.

Stock-market values are a leading indicator of: (1) the future earnings of stocks that trade it, (2) the monetary environment (principally interest rates) and (3) the economic environment. Of the three items listed above, you tell me which will improve in 2012?

I’m bearish on stocks going into 2012. But the immediate term, which is right now, I believe the bear-market rally that started in March of 2009 has more upside potential left.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. “We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.