This Is Now Your No. 1 Choice for Big Gains

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From the Editor: Subscribers who followed Keith's most recent play on U.S. Treasuries locked in a 100% gain on Friday. But "this game is a long way from over," he says. So here's what he's recommending now. Take notes. "Home run potential" isn't a phrase Keith uses lightly…

As I'm writing this, halfway through Wednesday's session, stocks are in danger of closing in the red for a fifth straight day. And this is all you'll hear about today.

Yet bonds are telling you the real story.

In fact, at this point, they are the next best thing to the Holy Grail if you've got the right perspective and understand what's happening.

This is a big moment.

It's big for uber-investors like Bill Gross, who just experienced something brand-new for PIMCO.

And it's big for you.

So at the very least, strongly consider the first move I'm going to show you today. You don't have to buy a single bond to take advantage of its home run potential. The other two moves I'm going to share with you simply "ice the cake."

But let's go back to the 1980s for a minute, when all this payoff potential began to build…

The Reversing of a 30-Year Trend

For years, we've seen bond prices rise almost without interruption. In the process, yields, which move in the opposite direction, have plummeted to historic lows.

Bond Markets

Since the 1980s, the decline in yields has been especially steep, as you can see in this chart of the bellwether 10-year Treasury from the St. Louis Fed… lulling millions of investors into a false sense of security via ultra-low interest rates.

Then, as the old joke goes, a funny thing happened on the way to the market:

The Fed mentioned tapering for the first time earlier this spring.

Not surprisingly, yields are moving higher while the whispering in the hallways is turning into a full-blown conversation… Will the Fed start winding down stimulus sooner rather than later?

Bond Markets

The markets are acting like this is a fait accompli, but I am not so certain.

As you know, I've said that Bernanke doesn't have the guts to take his foot off the gas. More to the point, he can't risk the market throwing a full-blown "taper-tantrum."

That's why the fact that he isn't going to this year's Jackson Hole Summit is critical; my guess is that he wants to let somebody else establish leadership so that the fireworks can begin under the next Fed Chairman (or Chairwoman's) watch.

Ironically, I think the event should be more appropriately titled the "Jackson Black Hole," because anybody who goes there is sucked into an alternate reality. But we'll come back to that story…

His not being there is implicit confirmation that the transition point we've long known is coming may be sooner rather than later.

The Exit Rush Has Begun

So far, investors have yanked more than $20 billion from bond funds this month alone.

While that's down from the nearly $70 billion they took out in June, we could see more than $500 billion coming out of bond instruments by the end of the year.

In fact, in June, investors pulled nearly $10 billion out of Bill Gross' Pimco Total Return Fund (PTTRX).

That's the largest outflow from the world's biggest bond fund since Morningstar started tracking the fund's flow in 1993.

This has prompted some serious selling across the spectrum, and it's only going to accelerate.

At the same time, yields, which run in the opposite direction from prices, are rising. The 30-year is now 3.87%, while the bellwether 10-year Treasury yield is pushing 2.83% after backing off from a Monday high of 2.88%.

Here's what that means…

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. George Jacobs | August 22, 2013

    Well Keith, I don't know if you are right or wrong on this, but my sense tells me it's a decent bet. Should we be using trailing stops on TBF and RYURX?

    Also, I'm going to ask this question for the third time. I'm concerned about using stops because of the danger of both "accidental" and "engineered" flash crashes, both of which have taken place over the past couple of years. I know that the sophisticated trading systems we are up against can see all those stops. What is your informed view on this danger?

    Thanks for your great work and thanks in advance for answering my concern.

    George Jacobs

    • Keith Fitz-Gerald | August 22, 2013

      Hello Mr. Jacobs and thanks for the thoughtful question. I apologize about having to ask three times. Somehow I missed the prior two darn it so I have some egg on my face here. I hope you’ll forgive me.

      Your concerns are absolutely valid with an estimated 70% of total exchange volume now believed to be computerized. Even so, however, every bit of research I have ever seen confirms that we are better off using trailing stops than not.

      That said, many investors are concerned about being bounced out at artificially lower prices and, therefore, don’t like the rigidness of trailing stops. I can’t blame them.

      If you’re in this camp, my suggestion is to purchase put options or inverse funds as a means of protecting your portfolio. There are several advantages:

      1) Put options and inverse funds can be married to specific positions you want to protect or used across an entire portfolio;
      2) Both give investors the flexibility needed to weather any storm without being forced to sell. The advantage is calm decision making when the dust settles; and,
      3) Investors can harvest profits by selectively pairing puts and inverse funds and either selling them at the same time or by bifurcating the returns should the markets really take a header.

      Experience suggests that buying protection generally costs about 1-3% a year so that’s something to think about. Like the insurance on your car, it’s an expense you hope you’ll never need but one that you’ll have to pay nonetheless.

      Best regards for great investing and no more flash crashes,

      Keith :)

  2. Gisele Hetu | August 22, 2013

    I would LOVE to follow your advice – please place me in your "advantaged club" TXS a million!

  3. Jeff Pluim | August 22, 2013

    As I said when Detroit filed for bankruptcy, this is the straw that broke the camel's back. Interest rates have no choice but to climb, regardless of what the Fed does. The Fed however, will be following instead of leading, this time. The Fed will have no choice but to raise rates in order to compete for the hundreds of billions of dollars that will be seeking a greater return in muni's and state bonds, and higher paying corporate bonds.

  4. David | August 22, 2013

    If the Fed pulls the carpet on the bond market in September, we know that bonds will fall quickly. What will happen with gold? Historically, September is the best month on record for gold. Is it going to be another strong month for the yellow metal?

  5. Linda Freeman | August 22, 2013

    Hi Keith. Thank you for being a wizard. You make me smarter.

    I was wondering how much of your portfolio should you invest with TBF and RYURX, and what is the expectations in time for profiting from these investments.

    Thanks

    • Keith Fitz-Gerald | August 22, 2013

      Dear Linda,

      Wow! Thanks for the kind words – you just made my day!

      As for TBF and RYURX, there are two ways to think about this. If you view these investments as hedging your entire bond portfolio, studies suggest that 3-5% of investable assets provides meaningful stabilization. If you are viewing them as individual trading vehicles, the rule of thumb is to position size so that neither is more than 2% of net investable capital. That’s typically measured one of two ways: 1) the dollar value of the investments themselves or 2) the dollar value of the net change in value of the investments does not exceed 2% of net investable capital.

      If this is a clear as mud, stay tuned. Your question has given me an idea for a future Marketology column and I’ll explain this in more detail there – complete with calculations.

      Thanks so much for being a member of the Money Morning family!

      Best regards,

      Keith :)

  6. 000002543535 | August 24, 2013

    HI Keith
    Thanks for your valuable comments
    Cannot find RYURX when pushed in at Yahoo finance
    RYURX is not mentioned at the Rydex inverse list
    Shouldn't it be RYUAX?
    Best regards

    Kurt Balmus

    • David Zeiler | August 24, 2013

      Hi, Kurt. I work with Keith here at Money Morning. You may have misspelled something, because RYURX is definitely correct. Our link in the story will take you to the listing on Google Finance. Here's the link for Yahoo Finance: http://finance.yahoo.com/q?s=ryurx&ql=1

      Thanks for reading Money Morning!

  7. Christine | August 24, 2013

    Hi Keith
    Thank you for sharing your investing ideas with us.
    I was wondering what are your thoughts on ProShares UltraShort 20+ Year Treasury (TBT) as opposed to ProShares Short 20+ Year Treasury (TBF)?
    If this turns out to be a long run down wouldn't TBT deliver greater returns?
    Cheers
    Christine

  8. 000002451642 | August 26, 2013

    Regarding your article on super dividends. Can you clarify if the payout per share is deducted from the share price as is the case with normal dividends? This question is absolutely critical surely as it affects the real profit.

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