Retraction

Ooops! Seems I was wrong about Bernanke buying 30-yrs. Everything is going to be in the 5-10 yr. range. But no matter. Either the Fed wins the battle against deflation, or they don't. And if they don't, then those long bond yields will most likely approach GDP growth trend plus 1.5%. Which is a target of 3-3.5%.

I will be watching the employment number tomorrow as well as consumer spending going forward for signs of economic improvement. This would be a sign to sell the bonds.

COCO Puffs?

COCO has been on a roller coaster for the past two months. After hitting a 52-week low of $4.23 in late August, COCO climbed to $7.19 the first week of October. Now it’s come full circle and is back down to $4.51.
This is the result of regulatory uncertainty, management decisions, and speculation. Two months ago, worries about the Department of Education’s new rules restricting student loans to COCO (and all for-profit school) students was the only thing dictating stock prices. Then on September 25^th, the stock was thrown a bone. The Dept. of Education announced that their ruling on for-profit colleges would be delayed, as reported by Bloomberg. This would prove to be the news that drove COCO to its recent highs.
More recently, COCO has been pummeled by unexpected bad news. First, the COO jumped ship on October 12^th (AP). The next day, Apollo Group rattled the industry by withdrawing guidance and warning of declining enrollment as they prepare for the Dept. of Education’s stricter regulations (Bloomberg). The final straw came yesterday as COCO itself announced tuition hikes and dropping enrollment (Reuters)

Too bad I had them picked as a diamond in the rough and bought options. Now things are ugly and looking worse. While COCO was a cash cow, those days may be over, as the whole industry is dependent on 80-90% of revenues for Dept. of Education regulated student loans. Who knows what the industry will be worth in the  
future.Ouch. Should have sold them in October. And the moral of the story is: When the market throws you a bone (as it did with the Dept. of Ed. ruling delay), Take It!

Trade!

Doubling down on the long bond.

Buy 50% position in 30-yr Treasury bond.

This brings me up to a maximum position on the long bond.

Why? First, the Fed announced $600 billion of QE2. This does dilute dollars thirty year from now. However, in the short-term, the Fed will have to buy longer term bonds rather than short-terms to get any lowering of interest rates. Short-term rates are already at record lows. So if the Fed buys anything, they buy the long bond.

Second, there is a distinction between devaluation and inflation. In an academic sense (whether right or wrong, bear with me here), inflation is a function of final demand. Devaluation is what the Fed is conducting now. This is why commodity prices are soaring despite the fact that consumer spending is flat, and global demand for commodities is down from the 2007-08 peak.

And where is that demand going to come from? Dave Rosenberg reports that the shadow housing inventory is at 107 months. That's nine years. Nine! So if the economy takes nine years to stabilize, then getting paid back in 30 years doesn't look so bad to me.

Finally, there's the knee-jerk pattern. For as long as I can remember, the knee-jerk reaction to any Fed announcement has been counter to the trend that ensued over the next month or two. Right now, a 4% coupon looks mighty tasty to me.