Pudgy Would Know

The Prism Daily
Your ‘One-A-Day’ financial news-tritional supplement, including trace elements of economic analysis that every healthy investor needs. Addresses a wide variety of monetary afflictions, from vacillation to impecunity. Specially formulated to go down easy! WARNING: Side effects may include elevated cognition and bouts of epiphany. If symptoms persist, unplug cable TV.

Prism Precis: Bond bubble leaking? Recent gains about to evaporate?

Today’s Market MRI: Horrible News for Bond Investors

Growth Stock Wire Reports: “That ‘hissing’ sound you hear is the air leaking out of the bond market bubble… No one seems to notice… that interest rates have spiked over the past two weeks… The yield on the 10-year Treasury note bottomed at an historic low rate of 1.4% two weeks ago. Yesterday, it closed at 1.62%… a 15% increase in borrowing costs. And it likely signals an intermediate reversal in the direction of interest rates… we now have a new series of higher highs and higher lows on the chart. We haven’t seen that happen off a deeply oversold level since last September when rates bottomed at 1.7% and then rallied to 2.4% six weeks later… A similar move this time would prop the 10-year note yield to 2% – basically right back to where it was in April. That’s horrible news for bond investors. It’ll wipe out all the gains of the past few months. And anyone who bought bonds recently as a gamble that the Fed would announce a new quantitative easing program will suffer large losses.”

Prism Responds: No doubt the reader is familiar with the plaintive strain of a bugler blowing taps. When Gordon was a lad attending Boy Scout summer camp in the hills of New Hampshire, a kid named Pudgy would croak out taps on a bugle every sundown as the rest of the boys stood at ramrod attention and did their solemn best not to wince. Those were the days when respect for the national flag required that it be retired and folded each evening, not left out all day and night in rain, snow and smog.

Is it time to play taps for bonds? Are investors who suffered large stock losses in 2007 now doomed to suffer large losses in bonds as well? Could the market be any less sensitive, any less caring, any less humane?

To ask such a question is to miss the point. The market is like the Borg on Star Trek. Unless prepared with your own contrarian deflector shield, you can plan on being assimilated along with the general public for whom hive thinking usually ends badly. The reason being that you can count on the masses to do precisely the wrong thing at exactly the right time.

Reading reference: “Extraordinary Popular Delusions And The Madness of Crowds” by Charles Mackay
Reading reference: “The Crowd: A Study of the Popular Mind” by Gustave Le Bon.

The market is not a warm and cuddly place where investors come together to share their feelings about prosperity and transformational abundance (that’s for our west coast readers). The market is a jungle of primordial emotion where only the fittest survive. Tarzan would have made a great trader.

The market is the fleeting distillation of the individual psychologies of millions of hopeful, fearful and otherwise emotionally engaged humans trading stocks and bonds. Anthropological studies teach us that mankind tends strongly to overreact when led by emotional urgings from the amygdala, the vestigial hind brain that regulates fight or flight.

Reading reference: “Kluge: The Haphazard Construction of the Human Mind” by Gary Marcus

The stampeding of investors from one side of the investment savannah to the other each time a ripe profit banana dangles into view — or a hyena approaches — is as predictable as watching the pendulum on a grandfather clock.

The savvy investor would take a portion of their bond portfolio and move it into inverse ETF’s (covered on last week’s Tuesday night ‘Open House’) to play bonds to the short side and offset some long side losses. But, alas, these things are not taught in home economics or shop class, and certainly not on CNN. So who knows?

Bottom line: It’s a jungle out there, Dear Reader, there are predators on the loose (domestic unemployment, European contagion, Bernanke) and the light may be dimming for bond investors. Pudgy would know.

Prism Solution: Why not bond with us? We can help you grow your money scientifically, using your frontal cortex! Get the banker’s secret (compound growth) working for you, not the bankers. Contact us today for a FREE Consultation. No hype, no sales, just straight answers. A light in the jungle.

Prism Profit Engineering Report: for July 2012 | download here (PDF)
Our Conservative, Moderate and Aggressive strategies produced respective client returns of 4.9%, 6.5% and 9.3%, projecting annualized growth of 58.8%, 78.0% and 111.6%. The average for all three was 79.0%. It would take 74 years for a 1-year bank paying 1.1% to match us. We mention this in passing for those of you who intend to live another 74 years.

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And May All Your Investments Be Profitable,

David Taylor and Gordon Philips,
Directors of www.Prism-Solutions.com

‘Better Investing Through Science’

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