U.S. Treasuries: A Once-in-50-year Event

For about 50 years, the 10-year U.S. Treasury never traded below a yield of two percent. This past Thursday morning, the yield of the world’s most popular government bond hit 1.99% for the first time in more than 50 years.There is no doubt we live in unchartered times for the various markets.

The Internet has changed the world. Instantaneous communication has resulted in the global economy moving faster than ever. The stock market can jump or fall 400 to 500 points in a single day. The bond market can wipe billions of dollars off the value of bonds in minutes.

For about 50 years, the 10-year U.S. Treasury never traded below a yield of two percent. This past Thursday morning, the yield of the world’s most popular government bond hit 1.99% for the first time in more than 50 years.

But half a century ago, the U.S. was a very different country than it is today. It had won World War II. Manufacturing and housing in the U.S. was booming. It was a creditor nation (countries borrowed money from us.). Fifty years later, Americais the world’s biggest debtor nation. Some say we face a debt crisis. But investors still run to our bonds. Why?

Two reasons…two things the bond market is telling us.

Firstly, the bond market is telling us that the new “norm” for the markets everywhere will be a very low rate of return on investment. It’s telling us the economy is going to slow down.

Secondly, we are dealing with the lesser of two evils. Right now, investors are focused on getting their money out of Europe. Where else can money go but to the safety of gold (which is booming) and U.S. Treasuries (which are rising in price).

Interest rates’ being low is playing havoc with anyone sitting with a large cash position. I wrote a couple of weeks ago about Bank of New York Mellon planning to charge customers with $50.0 million or more in cash to “hold” their money. And how about those poor retirees…how can they make a living off of what they have saved through a lifetime of working? The retirement plan idea, it’s out the window.

But what investors have not caught on to yet (or should I say only a few of us have) is the fact that the U.S. is actually in worse fiscal shape than the two largest economies in Europe, Germany and France. Our national debt-to-GDP is much higher here in the U.S. than it is in either France or Germany.

Each month, our government piles on billions of new debt to our already bloated national debt.  It’s ironic that the country with the greatest amount of debt, the country that creates more debt than any other, the country with the weakest currency, the country that will only see its debt rise as the economy weakens would have the most valuable bonds.

Dear reader, there is a term in economic analysis we refer to as “regression to the mean.” Basically, in time, all forms of investment return to their true value. Gold bullion has been going to that true value for 10 years now. Ten-year U.S. Treasuries? This investor wouldn’t touch them with a 10-foot pole.

Michael’s Personal Notes:

I’m against the market’s treatment of Hewlett-Packard Company (NYSE/HPQ) shares subsequent to the company’s announcement that it was contemplating exiting the personal computer (PC) business. In my opinion, getting out of the PC business would be an excellent move for HP.

HP controls about 20% of the PC market. Margins are tight on desktop computers; maybe only two percent to six percent. Let’s face the facts. Computing and communicating, once a function of the desktop, are now done on pocket-sized devices. Apple Inc. (NASDAQ/AAPL) owns that market. Google Inc. (NASDAQ/GOOG) is trying to get in the space by buying Motorola Mobility Holdings, Inc. (NYSE/MMI). HP cannot compete in this arena.

Leave the PC desktop market to Dell. They’re good at it. If I could read between the lines, I would say HP would like to take a chapter out of International Business Machines Corp.’s (NYSE/IBM) book. IBM decided years ago to leave the computer hardware market and focus on the software market. The change in focus was eventually a boon to IBM.

HP could be following in IBM’s footsteps. But the market is very short-term in nature. They are not thinking HP 10 years out. They are thinking HP today. There’s no money in the PC manufacturing business. There’s plenty of money in customized computer software and consulting. Hewlett-Packard is making the right move.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this last full trading week of August down 6.5% for 2011. What a month it’s been. These big 400- to 500-point drops on the Dow Jones have literally scared the retail investor away from stocks. I really don’t think that’s what the bear market wants to—it wants the opposite. It wants to take in more investors before taking their money away.

The pullback in equities has increased the attractiveness of both the price/earnings (P/E) multiples and the dividend yields of stocks. The Dow Jones now trades at a P/E multiple of 12.2 and an average dividend yield of 2.8%. This compares to a 10-year U.S. Treasury yield of 2.06%. Stocks are attractive again.

The bear market rally that started in March 2009 remains intact.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.