Rising interest rates are destroying bond funds, including the world's largest mutual fund – Bill Gross' PIMCO Total Return Fund. The $250 billion fund fell 3% in the 30 days through December 8. The only bond fund that underperformed PIMCO over the same period..?
The Vanguard Inflation-Protected Securities Fund, which fell 3.9%.
So rising interest rates are killing bond funds... We're seeing inflation. But the funds designed to profit during inflation, Treasury Inflation-Protected Securities (TIPS), are performing worse than normal bonds. TIPS' principal is supposed to increase with inflation and decrease with deflation. But that's not happening. TIPS are a joke for two reasons...
1) TIPS are fundamentally flawed. Investors buy them for protection against a money-printing government. But with each dollar the U.S. government prints, the likelihood it will repay those debts decreases. It's like the government is saying, "Hey, we'll pay you back if you buy Treasurys, but we'll really pay you back if you buy TIPS." In both cases, the issuer is the same.
2) TIPS follow the Consumer Price Index (CPI), which tracks the prices of a basket of goods and services… But the very government that promises to pay out in the case of inflation is the one controlling the CPI numbers. And we don't know where they're getting the info... The CRB Ag index (CRBA) is up 18% the past 12 months. The U.S. Oil Index (USO) is up 6% the last 12 months. Yet the CPI is only up 1.2% in the past 12 months.
At the exact time TIPS should be soaring (prices are rising, and interest rates are soaring), they're getting crushed. Just look at this chart...
While most of our editors have been predicting rising interest rates and inflation for the past year, many of them were early. But Jeff Clark, our options guru, nailed the rising interest rate trade. He's been trading the trend in both Advanced Income and Short Report. In a recent Growth Stock Wire essay, Jeff wrote:
You must bet on rising long-term interest rates. There is no easier trade in the market today. I've written about it here and here. If that's not enough, consider this my "pounding the fist on the table" moment. Interest rates are going higher. Every time rates dip down – even a little bit – is an opportunity to earn some extra spare cash.
Here's my point... Interest rates are going higher. We will not see 30-year bond yields at 3.5% again for a long, long time. So every time interest rates dip down and bond prices rise – even just a little bit – it gives traders an opportunity to enter positions and profit off the trend.
Bet on rising interest rates. It's the best wager for the next few years. – Jeff Clark, December 2, 2010, Growth Stock Wire
He says, "It's the best wager for the next few years." And Porter calls it "the only trend that matters for the next decade." Dan Ferris is also evangelizing about rising interest rates. In other words, when the best minds in the business agree it's a sure thing, it usually is. It's not too late to profit from this opportunity. You can short TBT, as Jeff recommends, or buy gold (among other things). If you're buying gold, we recommend you read on...
Last May, Steve Sjuggerud noticed one of the best investors he knows, Albert Friedberg, loading up on shares of a small gold mining company, Paramount Gold. Friedberg was also a major investor in Seabridge Gold (the best-performing stock recommendation in Steve's career – a 995% gain). And Barrick Gold bought another company Friedberg invested in, Arizona Star, in 2008 for 18 times his original investment. (This is a classic example of the "know who" aspect of mining investing we discussed here.)
Steve recommended Paramount to Phase 1 subscribers (the company was too small for True Wealth) at $0.74 a share. Today, shares jumped double digits to as high as $3.14. Phase 1 subscribers are up more than 300% on the recommendation.
We're in the midst of a super bull market in junior resource stocks. And our Phase 1 subscribers are making a fortune. This year, they've pocketed nearly 600% on ATAC Resources, nearly 200% on Rainy River, 130% on AuEx Ventures, and more than 100% on Almaden Resources. And the list goes on...
The timeframe for all these gains has been just months. Buying into a raging junior resource bull market is one of the quickest ways to earn big gains (just ask our friends Doug Casey and Rick Rule). When these stocks heat up, they don't just double... They go up five, 10, sometimes hundreds of times in value. It's crazy.
In the latest Phase 1, editor Frank Curzio recommended a junior resource stock he says could go up 20-fold (and that's based on conservative estimates). This company mines what we call "Supernova Gold." And the biggest players in the area are already foaming at the mouth to take this company over. We wrote all about it in Friday's Digest. You can also learn more about the situation here...
New highs: Altius Minerals (ALS.TO), First Trust Dow Jones Select (FDM), Inter-Citic Mineral (ICI.TO), Northern Dynasty (NAK), PowerShares Dynamic Biotech (PBE), ProShares Ultra Technology (ROM), Paramount Gold & Silver (PZG), BLADEX (BLX), ExxonMobil (XOM), AmeriGas Partners (APU), Take-Two Interactive (TTWO), Alexander & Baldwin (ALEX).
In today's mailbag... A question we get once a month. We cannot stress enough... DO NOT ENTER YOUR STOPS INTO THE MARKET. Any other great investing rules you know? Send them to feedback@stansberryresearch.com.
"In your December 2010 newsletter, your explanation of trailing stops states, twice, that you should never enter a trailing stop order into the market. What is the value of a trailing stop if it's not entered as a market order?" – Paid-up subscriber Tim S.
Goldsmith comment: If you enter your stop into the market, it's easy for a market maker to pick you off. It's much safer to keep mental stops and sell accordingly when the stock closes below that level. Or you can use a separate service that tracks them and alerts you when it's time to sell. TradeStops is a good example.
"How do you get the name of the company with supernova gold" – Paid-up subscriber Tommy Wages
Goldsmith comment: Sign up for the report... You can do so here.
Regards,
Sean Goldsmith
Baltimore, Maryland
December 13, 2010