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.
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?
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...
It's Time to Move
After an extended bond-market bull run, Bernanke's barbeque appears to be beginning. And that means the best way to play bonds for big gains is by shorting them. I think rates are going to rise no matter what the Fed does or doesn't do.
So if you're of the same thinking, here are a few moves worth making today:
1) Inverse bond funds, like the ProShares Short 20+ Year Treasury (NYSEArca:TBF) are a great choice, because they will appreciate as rates rise and bond prices fall - probably for decades. Even if you're early to the trade, this one could be a home run. Momentum is building.
2) Inverse stock funds, like the Rydex Inverse S&P 500 Fund (RYURX) make for superb hedges for the balance of your portfolio. But they're also great profit-makers during challenging market conditions. While I'm a big fan of holding these at all times as a means of hedging overall portfolio income, I believe now's a great opportunity to turn them into a more opportunistic trade. That's because support for Bernanke's bond programs is waning, which means that investors are not likely to step up with additional money for stocks... even if he continues QE. Imagine what happens if he actually cuts it back!
3) Options, for more sophisticated investors or more aggressive traders. You can accomplish the same thing with put options against the broader markets or call options on the inverse funds.
Some will think, No way... not me. Bernanke will never let go of things.
And they'll be right.
But traders backed by an estimated $500 trillion in interest-rate related derivatives - and the promise of hefty bonuses - will.