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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, December 23, 2011

Long Treasury Bond

Trend directional change was signaled over Mar. / Apr. 2011 in favor of a rising bond price and a  
falling yield. The key, as usual, was an interim peaking of industrial commodities prices as well as
the momentum of industrial production. The deterioration of pricing / production momentum is
ending here in the short term, but industrial commodities prices have yet to reverse to the upside,
leaving the T-bond directional indicator in neutral.

The long "T" is yielding around 3% which is inside of the 12 month inflation rate of 3.4%. Thus, the
bond is forecasting further sluggish economic activity and a marked deceleration of inflation. Basically,
a bullish case for the bond in 2012 rests on the assumption of development of an economic recession
in the US coupled with a deflation prone trend to the CPI.

The bond's price is exceptionally vulnerable to even a mild uptrend of industrial commodities prices
which can be a seasonal event evident in winter if there is a modicum of growth in the global
economy. Such occurs when inventories are built as annual production schedules are set.

The bond price hit a powerful overbought over Sept. of this year on EU financial crisis fears. It
then tumbled but whipsawed back up again when hopes faded in late Oct. that the EU would settle its
crisis. The bond has weakened some recently, but is still overbought relative to the 40 wk. m/a.
$USB  Watch it carefully relative to industrial commodities composites such as the DB industrial
metals ETF (top panel).

If you are yield rather than price oriented, check out the ^TNX The chart shows that it has been
unwise to be long the bond when yield is at a steep discount to the 200 day m/a.

Trader advisories are just below excessive bullish levels (MarketVane & Consensus Inc.).

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