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U.S. Treasury Bond TBT Upside Potential

Interest-Rates / US Bonds Apr 25, 2010 - 07:05 AM GMT

By: Peter_Navarro

Interest-Rates CHICAGO -- Regulators shut down seven Illinois banks Friday, bringing this year's tally of failed U.S. banks and thrifts to 57. The Federal Deposit Insurance Corp. found buyers for all of the failed institutions, and the failed banks' branches were all expected to reopen Saturday.

All of the failed institutions were included in's list of undercapitalized banks. Ten banks in Illinois have failed this year, the most for any state, followed by Florida with nine -- including three bank failures last week -- and Georgia with seven.

As you may have noticed, I've been off from newsletter duty for a few weeks. It's always tougher around tax season. Plus, I have been working feverishly to put the finishing touches on a book project I've been collaborating on with a former fellow Harvard colleague, Glenn Hubbard. The book is scheduled to come out in August, which means that we have to put the manuscript to bed by mid-May. So again forgive me for the silence.

That said, nothing much has changed from my last missive other than the market's upward trend has firmed up even a bit more. From a technical analysis point of view, all major indicators appear to be hitting on all cylinders. Waiting for the "market correction" or market pullback that everyone has been expecting has been much like Waiting for Godot -- who never comes.

Despite the market's bullish trend, I continue to be cashed out of most of the stock market and have shifted a significant chunk of my assets into a new piece of real estate. In doing so, I am implicitly calling a bottom in the housing market -- at least as it pertains to coastal California -- and I'm also implicitly calling a bottom in the mortgage market (if I have indeed correctly hit that bottom, I may wind up being one of the last few Californians to have gotten a 30-year jumbo fixed mortgage rate under 5%).

As for my trade that is not working for me (yet), I'm down about 6% on my "short the long bond" TBT gambit. The good news here is that the trade has gone sideways on me for a very logical macro economic-based reason. To wit: the trouble in Europe with the PIGS -- Portugal, Ireland, Greece, and Spain -- (particularly Greece) has triggered a flight to quality to the US and bonds have been a major asset of choice. As the dollar has strengthened and the euro has fallen, bond prices have been bid up, yields have fallen, and TBT has been a casualty.

The good news here for anyone hanging on to TBT -- or who wants to try this trade -- is that it is difficult to imagine a scenario where TBT could fall much lower. That would require a very unlikely further fall in long bond yields. So at this point, entry into this trade gives you much higher upside reward than downside risk. Ergo, I'm hanging on to TBT.

What I'm not hanging onto for now is my most successful biotech trade of all time – Prolor (PBTH). I nursed the stock for several years all the way from less than $.50 to close to five bucks and it's time to take my profits. This is not to say I won't reload. I do see this as a good long-term play. However, right now, a significant retracement looms as a significant possibility and I don't want to get left holding that bag.

As for my next highly speculative -- and I emphasize the word highly -- biotech stock, I am building a position in Senesco (SNT). It's a development stage company that has applications for both humans and agriculture. Last week was a good week as it jumped from $.40 to $.60. I'm always leery about some "pumping and dumping" going on, but this does seem like an interesting stock. Whatever you do, don't buy it based on what I'm writing here. I repeat, don't buy it because of what I'm writing here. Rather, do some of your own research and let me know what you think about this. I really would like to gather some more intelligence about this company.

As a final comment, I put that quote at the beginning of this newsletter about bank failures as a reminder that we are hardly out of the woods with respect to the credit and financial crisis. The good news about those bank failures, however, is that there were ready buyers for the failed banks.

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Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at

© 2010 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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