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Davidson Writes About Treasuries & What They Tell Us

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I have named my optimistic and very intelligent new writer “Mr. Davidson”. It is a brilliant pseudonym and maybe someday I will be able to explain it.

Wall St. Newsletters

Davidson Writes:

If you learn the effect of psychology on markets you will come to know that you cannot predict bottoms or tops. These are unpredictable turns in market psychology and is directly tied to the use of margin in how fast greed can turn to fear. No one has a handle on this although many claim to have modeled some market behavior or other only to have a 10 sigma event prove the model wrong. Long Term Capital is the most well known, but lately the market is strewn with disproved models. AIG hung its hat on a model by a Wharton/Yale professor and “poof”

You cannot model human behavior. You can observe, you can place a historical deviation to it, but you better not hang 20xleverage as so many have done and lost.

There is no better indicator of market psychology than the Treasury yield chart. All maturities are rising. This reflects substantial flow of funds into other opportunities. If fear still ruled, you might see the longer term maturities rates rise while the T-Bill rates remained low or even turn negative once again. Not so. All maturities show fund outflows. THIS IS THE TURN!

Buffett recognizes this among others.

He also provides the following chart:

Of it he says:

We have already witnessed a return to par of the LQD ETF(Invest Grade Corp) and a substantial rise in the HYG ETF(HiYield Corp) as well as rises in all the indices since November. House sales appear to be finding a bottom, The insider buying is extraordinarily high, investor and consumer pessimism at record 30yr+ levels, savvy investors announce new commitments(Buffett, Ackman, Berkowitz, Cumming and many not as well known) weekly.

Changes are there for all to see if only they would give up listening to the endless stream of negative headlines. Markets turn without fan fair in the gloom of pessimism. I think the best time is to invest is now.

Treasury rates are rising across all maturities as this chart from Don Hay’s recent note indicates. The best interpretation in my opinion which has been offered by only few observers thus far is that capital is flowing from Treasuries to other parts of the economy and securities markets. The desperate hoarding of cash that has been a hallmark of the current economic slump is diminishing in my view.

I remain positive that the current financial issues will be resolved and that this chart provides strong evidence for this.

Disclosure (“none” means no position):

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