You’ll receive your new Investment Digest issue, with all 50-plus Top Picks for 2013, this afternoon. First, this morning we have one more extended recommendation, from Sound Advice Editor Gray Cardiff. Here’s his favorite investment for this year.
“In this report, we discuss an Exchange Traded Fund (ETF) that is poised to provide explosive profits. It is only a matter of time. This investment comes as close as one can get to a ‘no-brainer.’
“It’s difficult to imagine that the Federal Reserve will be able to smoothly drain the trillions of dollars worth of new money and credit it has pumped into the U.S. economy through Operation Twist and QE 1, 2, and 3. In the aftermath of any recession, interest rates always rise. It is as simple as that. This will be especially true for yields on long-term Treasury bonds because their yields carry the highest premium for the uncertainties of inflation for the upcoming decades.
“After the mammoth measures taken this time, with the additional national debt and need to sell that much more in Treasury bonds to finance that debt, the move upward in long-term bond yields is bound to be breath-taking.
“Here is an ETF trading on the NYSE designed to behave as if it is shorting Treasury securities, known as a ‘inverse’ ETF because its price action is opposite to the underlying security’s. This ETF is focused on long-term Treasuries because longer-term bonds will have the greatest price movement for a given change in interest rates. The most responsive ETF, the Direxion Daily 20-Plus Year Bear 3x Shares (TMV, $57) uses 3:1 leverage. The profit potential is enormous with this ETF.
“To exemplify, we look back at the period from December 31, 2008, when 30-year Treasuries were yielding 2.69%. By June 10, 2009, yields had climbed to 4.75%. These ETFs did not exist back then. (They were created in April 2009.) To see how they would have behaved, we can use the daily history of percentage changes in 30-year Treasury bond yields. Starting with today’s price of TMV around $50 a share, we can apply three times the reverse of the daily changes (because TMV uses 3:1 leverage). Based on this history, TMV would climb from $50 to $219.55 per share — more than 4 times — in 110 days. You can see this theoretical advance in the chart below.
“The upcoming rise in long-term Treasury bond yields need not be helter-skelter or even explosive, although it is likely to be both. This time, yields on long-term Treasuries are likely to climb significantly higher than 4.75%. In the history of 30-year Treasury bond yields, even 4.75% is historically low.”
- Gray Cardiff, Sound Advice, January 2013