Cash is King

Posted on by The INO.com Team

Please welcome Paul Judd to the Trader's Blog stage where he will present to you a very interesting trick...BONDS ARE GOOD! Paul should know as he's dedicated the last 14 years to treasury bonds where he's learned the in's and out's that we should all take a look at! So please read the article below, visit Paul's Blog here, and let the comments fly!

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I can take a position in the bond market prior to the release of an economic report. Once the report is released, I can close out my position and take profits. Cash is King!

Not so if you are a long-term investor in stocks.

A popular slogan used by many “salespeople” on Wall Street is to buy and hold for the long term. However, not only is your money tied up for years but also holding for the long term doesn’t necessarily mean you will make a profit.

For instance, if you had invested in the stock market in 1962 and held until 1982, you would have lost money.

The following are comparisons as to why trading bonds can be better than buying stocks:

Advantages of
Trading Treasury Bonds

Disadvantages of
Being a Stock Investor

Trading the bond market gives you flexibility. In other words, we can either go long (buy) or short (sell), depending on what economic report will be released.

Most people who invest in the stock market go long (buy stocks).

It doesn’t matter to us if the economy is slowing down. We can go long bonds

A slowing economy affects corporate profits, which can cause stocks to go down.

Inflation is the enemy of the bond market. When this occurs, we can short bonds.

Inflation is also the enemy of the stock market, which is bad for stocks.

Disinflation is a good thing for the bond market.

CEOs get worried about disinflation. So do stock investors.

Deflation is the friend of the bond market. When this occurs, we can go long bonds.

Deflation is the enemy of the stock market. It affects corporate profits

When Alan Greenspan of the Federal Reserve raises interest rates, this can mean a bear market in bonds. In that case, we can buy put options.

Alan Greenspan watches the stock market, and many consider him the enemy of the stock market. Remember his famous speech in the late ‘90s, in which he uttered the words “irrational exuberance”? This caused the stock market to tumble.

A weak report from the Federal Reserve, such as the Beige Book report, can lead to a bond market rally

The Beige Book reports measures business conditions across the U.S. A weak report can mean a weak stock market.

Tight fiscal policy, such as tax increase, can lead to a rally in bonds.

Tax increases to the consumer or to businesses are another negative when people buy stocks.

The Secretary of State is always a friend to the Bond Market.

The Secretary of State can be the enemy of the stock market.

Government regulation can slow the economy. Bonds like that.

Government regulation can put the hand-cuffs on companies, which again can be bearish for stocks.

The strength of the U.S. dollar can be bullish for bonds.

The strength of the U.S. dollar can be bearish for multinational corporations.

Rising Oil Prices can mean a selling opportunity in bonds.

Rising oil prices can cause stock prices to slide.

Consumer sentiment in which Americans are reporting that they are worried about their jobs is positive for bonds – they like that.

Restructuring of a company can lead to layoffs and falling stock prices.

Event risks man a “flight to quality” in the bond market. An example would be the horrible situation that took place on September 11, 2001, in New York.

The September 11 attack caused a global economic slowdown, which, of course, was another negative for the stock market.

When new home sales or existing home sales are coming in strong, we can go short bonds.

Americans investing in a home instead of stocks can put a cap on stock prices.

An economic slowdown can mean a sideways-moving market in stocks and a bull market in bonds.

It’s hard to make money when buying stocks if the market is going sideways.

Yes, compared to the bond market, stocks can be more risky.

One last point to deep in mind: A stock investor may only invest in “blue chip” companies such as Enron, which was the seventh-largest company in the United States and had 600 accountants looking after the books. I find it interesting that every major mutual fund company had this “darling of Wall Street” in its portfolio. Yet most stock investors know by now that this $80-billion company came tumbling down.

People on Wall Street also say that you should diversify. I teach that having an “edge” over most people is to know one market, and yet, as a bond trader, I can still diversify by going either long or short bonds. Cash is King!

Treasury Bond Options Versus Stock Options

Even though we only trade the bond market, which can be traded either with futures contracts or with Treasury bond options, it’s a good idea to become familiar with both types of options.

For instance:
•    Bond and stock options consist of a seller and a buyer.
•    The terms are the same, such as premium, time value, out-of-the-money, at-the-money, in-the-money, intrinsic value and exercise price.
•    Both bond and stock options are “American-style” options, which means that the buyer can choose to exercise his right to the underlying futures contract or stock before option expiration.
•    Dividends are also paid on various stocks, which can distort a stock option’s premium. This can’t happen with Treasury bonds.
•    Volatility skewing is more prevalent with stock options than with bond options.
•    Stock options are currently traded on five US exchanges:

1.    American Stock Exchange (New York)
2.    Chicago Board Options Exchange
3.    New York Stock Exchange
4.    Pacific Stock Exchange (San Francisco)
5.    Philadelphia Stock Exchange

•    Stock options began trading in April 1973. The Chicago Board Options Exchange was the first to offer listed stock options.
•    Bond options are traded at the Chicago Board of Trade.
•    Bond options began trading October 1982.
•    Margin requirements when writing options are higher for stocks than bonds.
•    Which gives you more leverage? Bond Options!

Paul Judd
Please visit bondminicourse.com to learn more about me!

24 thoughts on “Cash is King”

  1. It is not and "either/or" argument...my portfolios include both!! 25 % in stocks that I handpick myself, 25% in bonds of which half are in tax-free muni's, 10% is in precious metals and diamonds with the rest in various cash instruments!!! I truly believe the new reality lies in taking profits (or losses for that matter) quickly and have ready replacements to constantly replace the beggars and cash to improve stakes in the winners!!

  2. I believe the U.S. will have rising interest rates. What trading-instruments can be utilized by people that aren't able to daytrade Futures or Options. ? Mutual Funds/ ETF's/ etc... * I'm looking for a pure-play on ($IRX ). Thank's.

  3. I am from Canada. Do you have a 1-800 number to call you? That is a toll free number? Can I do this bond trading for a living? I am not working now and am looking for a career change.

  4. Thank you John S. What's that old adage..."If it's so easy and you're making so much money...then why do you need me...???" Haha...

  5. Hello,

    I am sorry to be negative, but I am!
    I have faithfully invested into your Market Club and I believe in this site.
    I have asked you to show the new comers exactly how to use your site.
    I have done all the reading.... it is not working.

    I see a green triangle for timing , a monthly triangle for trend.... daily for a sense of volume.
    Yet...I always lose money.
    Please help the new comers...the savvy know quite a lot, what about us?
    Our money is as good as the pros.

    When the green triangle is seen...I usually look at the Oscillator
    but , I guess I am asking you, Adam, how do I go about tracking a winning trade?
    Thank you,
    Willow

    1. Willow,

      Please feel free to give our support line a call 800-538-7424 and ask for Jeremy. He will be able to help you.

      All the best,
      Adam

  6. John S.
    Thank-you for the link. You have done all of us with limited experience in bond trading a great service. In my opinion sir, you are to be considered a gentleman and scholar.

  10. Why does the discussion of Bonds vs Stocks ignore the ability to short stocks? If someone was willing to short bonds, he should be equally willing to short stocks when appropriate.

  11. I just sent a long post and it looks like it didn't go through.

    Therefore, I am sending this one with hopes that people are willing to just listen.

    I am an owner of my own business that trades stocks. Better yet, I teach people how to trade before going further. Once they feel comfortable, they can then join us in the updates that I provide each and every individual that is interested in trading.

    The bottom line is that I developed a trading system that has provided the following over approx. 7 years of trading and testing.

    1) POSITIVE RETURN ACCURACY: APPROX. 85%
    2) NUMBER OF TRADE SIGNALS PER YEAR: APPROX. 2 TO 3
    3) AVERAGE RETURN PER SIGNAL: ANYWHERE FROM 5 TO 25% PER SIGNAL (PER STOCK)

    4) ANNUALIZED RETURN: ANYWHERE FROM 15 TO 75%

    1. Dear Scott,

      I would also google the CME Group. There you can find quotes
      on the 30-Year Futures Bond Market. I have been at this market
      coming up 15 years. It is more predictable than these other markets
      and you can make money faster!

      Sincerely,
      Paul Judd, CTA/CPO

  13. How can an individual investor trade these bonds.Can u recomend brokers through whom we can trade bonds and how do we know which bonds are good to trade?

    1. Kay,

      When it comes to a Brokerage Firm you can google
      Commodity Futures Brokers. I do not recommend anyone
      specifically, it is a individual preference.
      There are good brokers out there that are committed to
      the business.

      I have been at this market coming up 15 years. It is more
      predictable than these other markets and you can make money
      faster!

      Sincerely,
      Paul Judd, CTA/CPO

  14. Would a Bond ETF be a viable addition to our "Perfect Portfolio"? Perhaps 20%... 20%... 20%... 20%... 20%.

    1. Lee,

      I personally do not have a porfolio.
      As you know, I made a commitment coming up 15 years now to focus
      on the 30-Year Futures Bond Market.

      So when it comes to these other markets or other types of bonds
      I cannot answer that.

      Sincerely,
      Paul Judd, CTA/CPO

  15. I wonder if "individual" investing might not have come of age during this recent crash? So many mutuals are badly managed so what is the downside to just doing it one's self???

    1. Great point, Stan. Most of the mutual funds do not beat market averages, either up or down. How can these people justify any management fees? Just by being long SPY you outperform most of them, at a fraction of a cost.
      Maybe that's why really good many managers, people who actually CAN make money, are trully worth looking for?

      1. Once I became computer literate, I am slowly doing almost all my own investing because of both cost and ineptitude of the managers...besides that I can control my own destiny and the family trust which, since I began managing it, is doing at least as well... if not better.... than when it was managed by others...I play poker on two sites: one is with real money while the other is played with points earned...the difference in how people bet and what they will bet on is amazing to watch!! That's my controlling analogy!!

    2. Dear Stan,

      You are better off doing it yourself.
      The average mutual fund manager only has 2 - 3 years
      of experience.
      I also do not watch the Business Channel. The reason being
      is because that is where all the confusion starts. If you watch
      it long enough you will hear Bullish and Bearish opinion
      "from the experts" on any market. You are better off to focus
      on one market and know it better than anyone else. I chose
      Treasury Bonds over these other markets because it is more
      predictable and you can make money faster!

      Sincerely, Paul Judd, CTA/CPO

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