 | TBT: Price Target Revision | |
For those of you who are following my "Easy Money" early 2009 trade I suggested last weekend, here's an update. One of the OTC Journal faithful who is much smarter than me pointed out TBT was not likely to trade back to $60 as the Long Bond went down to former levels. The percentages didn't work.
If you missed last weekend's edition, here's a quick recap. I am recommending TBT as an easy money trade for early 2009. TBT is an ETF that trades 2 for 1 inverse of the US Treasury long bond . Bonds 101- If there's more buying than selling in bonds, the price goes up. If the price goes up, the yield goes down.
The US Treasury Long Bond recently traded high enough to have a yield of 2.5% - a level not seen since 1952. It's a reflection of irrational fear- the "Fear Bubble" if you will. Money has been pouring into US Treasuries in absurd quantities purely out of fear- the 90 day T Bill once traded so high it had negative interest- at the price you bought it, you had to pay money. Absolutely absurd.
The Long Bond has started to come back down. I suspect money will come out of the Long Bond and go into investment grade corporates at 8%, which are absurdly oversold.
Here's a look at TBT :
When TBT was trading at its bottom- it made a low of about $36 in conjunction with a yield of 2.5%. The Long Bond is now yielding 3.02, so the price of the long bond has come down and TBT has gone up. TBT has appreciated to $42 on the Long Bond move of .52% up .
Therefore, TBT has appreciated 16.6% in conjunction with a 20% increase in the yield on the Long Bond.
If you assume the Long Bond is likely to go back to a more traditional yield in the 4.5% range- there's another 50% move in the yield coming. If the ratio of movement in TBT continues on the same pace, a 50% move in would equate to a 41.5% move in TBT .
At the current price of $42 we end up with TBT at $59 per share if the Long Bond makes it back to a 4.5% yield . At a more reasonable level of 4% , the price of TBT would probably be in the $50 to $55 range .
Therefore, I believe once, and if TBT trades above the $50 level , that would be the time to take either part or all of your profits. The overall interest rate picture is not going up anytime soon, so I don't see this as a very long term idea.
Currently, I own 1000 shares at $40 and 10 March 40 Calls at $4.20.
Also- if you're looking for a trade- consider going long the S&P 500 tomorrow about 1/2 hour after the market opens. The jobs report is bound to be atrocious, but the market has been selling off this week ahead of the news. SSO is a two for one long on the S&P 500- consider picking that one up 1/2 hour into the trading day.
$42.52 (01/09/09)
