Nine Winning Trades For 2009
Houghton and Atkeson, March 22, 2009
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Trade #7: Buy Inflation Adjusted Treasuries
Treasury Inflation-Protected Securities (TIPS) are essentially Treasury bills that pay a fixed coupon, but adjusts the principal annually according to the rise in the consumer price index (or CPI, which is a measure of inflation). TIPS can be purchased directly or through the iShares TIPS Bond ETF (TIP).
If inflation is defined as "too much money chasing too few goods," we may see some, as the government is required to print dollars as never before to pay for the incredible debt burden that it has recently acquired. Remember, for those in debt, inflation is good because debt is put on in today's (or yesterday's) dollars and paid off in future dollars, which are worth less.
Analysts estimate that the TIPS market is currently priced for deflation for at least the next seven years. If inflation expectations of just 2% are re-priced back into TIPS (where they were just two months ago), you could experience double-digit capital appreciation in these securities over the next two years.
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Looking into June, the market should begin refocusing on upcoming earnings reports for evidence the economy is gaining momentum.
Watching the Treasury's Actions
In the short-term, the government's bond auction is likely to be a key driver of stocks.
Treasury Auction Boosts Market
The Treasury's auction of two-year notes brought an upside surprise which should alleviate fears of a lack of demand for U.S. paper.
Credit Markets Point to Upturn
The credit market, a reliable indicator of equity direction, suggests we will break out of the SPX's trading range to the upside.
The market seems to be saying that a 30% move up from the lows is ahead of the real economy and the market needs to allow the economy to catch up.
