NOV 25th: PORTFOLIO POSITIONING
During the final minutes of trading on Friday I took a mid-sized position in TMV. I posted the following tweet shortly after the close:
This is a short long bond/long yields trade.
The dynamics behind this trade are similar to the short gold trade I initiated in September. On August 21st, I posted an article with respect to the fact that a majority of future scenarios results in lower gold prices. Basically, there were very few scenarios that would see gold continue shooting up.
I believe the same to be true with the long-dated US debt at present. If you remember during the 2008 crisis, the second leg of the crisis saw yields skyrocket while equity prices plummeted. This was in direct contrast to the first leg of the crisis which saw US debt become the investment of last resort. That mentality changed as fear turned into panic.
At present, we are getting to a point where if things continue moving down the fear we have seen over the past few months will begin to turn to panic. There is a pronounced difference with our current crisis, however. The sovereign debt of our next door neighbors (economically speaking) are being drawn into question now. With this past week seeing the debt of Germany actually being greeted with some suspicion based on worries of a worst case scenario for the EU taking place.
You can bet if the panic police are knocking on Germany's door, it is only a matter of time before they come looking in the next door neighbor's house. Not to mention, we have seen that when fear turns to panic, all bets with respect to the stability of so called "bastions of safety" come off the table.
The alternative scenario is that we begin recovering some of our equity losses here over the next couple of weeks. In which case, attention will begin shifting to the US economy and the potential for another great quarter of earnings in January. Given the compressed state of yields, we are far from factoring in any type of economic stability, with fear and subsequently safety being at the forefront of investor's minds.
From my perspective, it seems that either way you slice the short bond/long yields play, it has entered a zone where substantial odds favor an increase in yields over the short to intermediate.
