Treasuries: The Stealth Bear Market


Many of you will be tempted to buy bonds on this recent sell-off, but don't do it - you ain't seen nothing yet. The Bear Market is still in its early stages. You want to be very wary of the bond market. There are some very scary things taking place. Back on March 19th, the Fed announced that it would pump $1.25 trillion into government bonds. On the day of the announcement, bond prices soared as the rate on the 10-year bond declined by 54 basis points to 2.59%. But the rally did not last as rationality set in very quickly. As of last Friday's data, the yield on the 10-year bond now stands at 3.45%. So, we can see that the March rally was purely government manipulation and short-covering by nervous traders.


The Fed is buying up all this government paper in an attempt to keep interest rates low. Its plan is to spur economic activity via artificially low interest rates. THEY NEVER LEARN. There is only one main problem that all Socialists seem to overlook: Nature's Laws of Supply and Demand. Thus their problem is that it's not working. Even with all that firepower at their disposal, because of the Laws of Supply and Demand, they cannot keep rates from rising. As such, just as I have been warning you since January 2009, the next major financial bear market crash will be in U.S. government bonds including Muni's and although is started back in January, it has not yet been recognized by Wall Street.

Do not buy bonds: More than $2 trillion will be borrowed by the U.S. Government this year alone, that's 4 times more than in any other year ever. In order to attract global investors, rates will have to go up. Five percent coupons on the long bond are a sure thing in the near term. Remember the 1980s, interest rates can go to 18% or more. At this time, there is no plausible way to tell how high rates will go, but we can very reasonably assume that the overreaching trend will be much higher rates, not lower ones.

Interest Rate Increases Can Be Great News for Your Portfolio if you are prepared for them.

Bond prices move INVERSELY proportional to Interest Rates.

So, aside from trading interest-rate futures, there are several Exchange Traded Funds (ETFs) that allow you to profit from government debt interest-rate fluctuations.

One particular ETF for the long bond is the Lehman Brothers 20 Year Treasury Index (Symbol: TLT). If you think rates are going up, you can short the TLT or buy Puts on it. If interest rates rise, the price of TLT will go down. The opposite is also true - if interest rates drop, the TLT will rise in price. Just remember, if you short TLT, you are on the hook for the interest-rate payments the same way that you have to cover the dividend payments when you short a stock. Luckily, interest rates today are not very high.

A way to mitigate that risk is to trade Put options instead of short-selling. A Put option will go up in price as TLT goes down in price. It has the added benefit of having no requirement to cover the interest payments that you would have to pay if you shorted TLT directly. But interest rates are built into the price of the Options. Another advantage of using Put options is that you can't lose more than you "put" into the position -- the amount you spend to buy the Puts is your maximum dollar amount at risk.


If you don't want to short TLT and you don't want to buy options, there is another way that you can play rising rates. ProFunds has two leveraged ETF products, one that tracks the TLT and another that tracks the 7-10 Year Treasury index. They are the ProShares UltraShort Lehman 7-10 Year Treasury ETF (Symbol: PST) and the ProShares UltraShort Lehman 20 Year Treasury ETF (Symbol: TBT). I have mentioned the TBT for months now.

These two "UltraShort" ETFs are what are known as "inverse" ETFs, which means that they go up in value as the index they track goes down in price. There is one big difference though -- that term "Ultra" means that you get leverage of 2-to-1. So, for every 1% the index goes down, the Ultra ETF will go up by 2%.

Remember that leverage works both ways. If the index goes up 1%, the Ultra ETF will go down 2%. If you want to leverage your position further, you can use options. Both have Puts and Calls available to trade. Because the Ultra ETFs go up when the index goes down, you could substitute Call options instead of directly buying the ETFs.

Inverse ETFs are terrific for investors who are unable or unwilling to trade on margin. All short sales require a margin account. However inverse ETFs can be bought in a non-margin account such as an IRA.

You can also use further increased leverage by buying Direxion ETF'S-

  • Direxion Daily 10-Year Treasury Bull 3x (Symbol: TYD)
  • Direxion Daily 30-Year Treasury Bull 3x (Symbol: TMF)
  • Direxion Daily 10-Year Treasury Bear 3x (Symbol: TYO)
  • Direxion Daily 30-Year Treasury Bear 3x (Symbol: TMV)

Each of these ETFs will give you triple the return of the daily move of the underlying index that they track. They provide a bullish and bearish ETF for both the 10-year Treasury note and the 30-year Treasury note. Each of these ETFs also trade options. But be careful because the options are thinly traded.

A word of warning on the Direxion products: They are not appropriate for long-term holds. The reason is that, over time, the relationship of the ETF pricing and the underlying index degrades. If you are going to play the triple-leverage ETFs, make sure that you have a tight stop-loss in place and recognize that these instruments are designed for short term traders, not longer-term investors.


For the last few weeks, the market has been basically going nowhere. For the majority of the days we have a quiet session, with the markets trading on either side of the flat line, at least until the tail end. Then there was a last hour burst of buying or selling depending on which force was temporarily succeeding in manipulating the market. Last Friday was also the end of the month and after a whole day of backing and filling, we got tremendous last hour upsurge due to end-of-the-month portfolio squaring that sent stocks higher and closed the indices out with 1% (or better) gains. A quiet session turned into quite a rip-roaring session by the closing bell.

Nothing has changed and yet we never seem to learn. The circumstances may be slightly different, but the game is exactly the same. The Government, in pursuit of their social policy, creates massive liquidity that causes Bubbles. The last time around, the reduced interest rates and easy credit were all directed to individuals to facilitate home purchasing, including huge massive speculation and that is exactly what we got.

This time around, with the Government's newly acquired super power, it is once again pursuing its long desired Socialist agenda. In the name of stimulating the economy, they are doing what they always do: Pour money at a problem. However, this time it is all directed to pay off their supporters, crony (Socialist-Capitalist) buddies and financial supporters (banks, brokers, unions and "Green" supporters). Even though a great deal of hoopla is given to bailing out underwater homeowners , in actuality all that money is really going to bailing out the mortgage holders and not the homeowners (who is the real homeowner if his mortgage is 50% larger than what his home is actually worth). The reality is that the money is being directed in one form or another at Wall Street instead of the people. The outcome will still be the same: A new Bubble (the Stock Market) only this time, with the economy in more dire straights to begin with, the Bubble will be smaller and much more devastating when it finally bursts.

The actual news did not do much to excite investors. GDP came in at -5.7%; that was less than the -5.5% expected, though it was better than the -6.1% previously reported. Consumption was down 2.2% - originally it was reported down to 1.5%. It was not a very encouraging report. We did not see any kind of revisions that showed things are getting better, and that is what everyone is looking for and talking about in the economy.

NOTE: You should realize that after a 50% stock market sell-off and with the end of 1st quarter expected terrible earnings reports, EVERY CFO WORTH HIS SALT WILL WRITE OFF everything but the kitchen sink, thus setting up improved next quarter earnings comparisons. This is one of the prime motivators of the expected 50% Bear Market Suck -In Rally. Although I was expecting a 500 point or so consolidation before the final summer rally push into the July 2nd quarter earnings reporting, I neglected to take into consideration the daily campaigning of a very popular President and the $ trillions he is pouring into Wall Street. Meanwhile, the real facts don't matter. Oil was up again pushing towards $70/bbl . Gold surged, pushing that $1000/oz mark - back near the yearly highs it hit in February and not too far from its all time high of $1030. The dollar's getting hammered again and interest rate spiking also did not seem to matter either as ALL SIGNS POINT TO A 1930's TYPE SUCK IN BEAR MARKET RALLY.

There is tons of printed money and cheap credit being thrown at this economy. Not at households, but at large financial institutions. Any Economist come Analyst worth their salt knows that inflating assets in the face of a worldwide recession is telling us that: All this printed money causing inflation by lifting most commodities and stocks is at the expense of the Dollar. But this money being printed would be better off being burned. It is being thrown at a spiraling black hole of defaults and shrinking money supply due to the size of all the defaults and will soon follow them into the Black Hole. Unfortunately, the liabilities will remain. This trillions of dollars printing contagion is effectuating a short to intermediate-term boost in stock prices, but it will only be temporary. In spite of all this monetary inflation, markets will crash after this rally reaches its Obama created euphoric conclusion…and end up far lower than the starting point of this wishful Bull that started in March of 2009. I think the Industrials will peak at between 9500 and 10000 over the next 2 to 3 months, and the S&P at around 1000. Then watch out below.


Weather it's the Precious Metals, Stock Market or Bonds, everything seems to be behaving almost exactly as expected. Therefore the only thing to do is continue on with our strategy that we have been following for months now.

  • Stay Long TBT and stay short the TBT Puts (cover your short June 45 puts at $0.10 and short September 50 Puts. The premiums are expanding nicely so if you want some income, you can short the July 55 Calls against your long TBT position.
  • For newcomers, you can try a bull spread on the TBT: Buy Sept 55 Calls and sell Sept 60 Calls for a $2.40 debit. That will double your investment if TBT is 60 or above in Sept. (breakeven is at $57.50).
  • Although I am still looking for 9500 +/- 300 points, going long is for experienced traders only and if you decide to trade, immediately enter an (OPEN ORDER STOP) limiting your loss to 8% and scale up your stop as the stock moves in your favor. I don't want you sitting with losses and no cash when its time to go short, sometime in July or August.
  • Gold - Well, what's there to say? Stay with your positions and add to them on sell-offs to the $850 area or buy on a breakout above $1060.
  • If you are under invested in GOLD or are new to the PM, you can also sell out of the money Puts on the GLD, AEM and GG and try to buy NXG and GSS on pullbacks to below $2.00.


I have spent my entire career identifying major trends in the markets and helping others to profit from them. These are trends that will be happening in the near future; trends that most analysts and investors notice only after they have already been well established and we have made the majority of the easy money. In my newsletter, "UNCOMMON COMMON SENSE", once I uncover changes to the major trends, I then present specific, actionable recommendations that will help you profit even during the worst of times and before they become obvious to everyone else.

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Aubie Baltin CFA, CTA, CFP, PhD.
2078 Bonisle Circle
Palm Beach Gardens FL. 33418
[email protected]

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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