Posted on 07/07/2009 7:53:41 AM PDT by FromLori
Again.
Now, just to be clear, these don’t exist – yet. Cramer introduced the idea during Monday’s Mad Money as a way to offer people a healthy balance between risk and safety, growth and income. Investing options seem limited these days, and he doesn’t want people falling prey to the countless scams that promise 300% returns. So he called for the Treasury Department to issue 30-year, 5% bonds as a way to help families who are desperate to recover their savings.
What am I talking about here?
Cramer "suggested" that Treasury sell 30 year "special" bonds to people for use in retirement accounts, yielding 5%.
I fail to understand how these are different from an ordinary 30y Treasury, which you can buy now, using Treasury Direct, and which carry no commission if purchased directly from the US Treasury.
There is a problem with long-duration bonds that most folks do not understand: If you want to sell them before they mature the price is not guaranteed.
Buying long-term debt when interest rates are at historic lows is stupid just as was Alan Greenspan "suggesting" that people take ARM mortgages during the previous low point in long-term interest rates.
Why?
Because the current price of a bond changes roughly at the interest rate change times the remaining duration.
So let's say for the sake of argument that you buy ten of these 30 year 5% bonds in your 401k. You now have $100,000 in bonds that yield 5%. Booya, right?
Well, not really.
See, government continues to spend more than it makes. This causes the market to refuse to buy 5% bonds (outside of your retirement account, of course) in the free market, and the interest rate is driven to 7% for new issue 30 year Treasuries.
You "lose" 2% that you could have made. That's all, provided you hold the bonds to their 30 year maturity. Or is that all? What's $2,000 a year in lost interest times 30 years? You have foregone $60,000 in interest!
Even worse, what happens if you need to sell them when there's 25 years of duration remaining?
The price will be discounted by (roughly) the difference between your coupon and the current coupon times the remaining duration!
(Its a bit more complex than that as there is time value to money and that gets important with longer durations such as I'm illustrating here, but that's the simple way to think about it.)
So we have a 2% interest rate change, or $200 a year per $10,000, that is, $2,000 per year on your $100,000 investment. There is 25 years of duration remaining. Uh, what did you say your bonds were worth again?
$50,000 - you just lost HALF of what you put into those bonds!
Why does this happen? Simple: If I buy one of the new bonds, I get 7% interest. So on $100,000 of new bonds I get $7,000 in interest per year, while you get $5,000 a year in interest on your old bonds. If you want me to buy your old bonds you are going to have to discount their price by the difference in interest payments times the remaining duration, roughly.
(Again to be fair that's not PRECISELY the correct valuation change formula as there is a time value to money, but it illustrates WHY it happens, and how volatile the value of long-term bonds can be!)
Safe investment huh?
Oh by the way, Cramer knows how badly you can get screwed by buying long bonds at or near the bottom of a secular interest rate trend; he's not that dumb.
No, he's a useful tool - he, along with everyone else in the government and media, is well-aware that government is currently unable to find enough actual money to fund their deficit spending except by finding someone to screw - that is, they need to con someone into lending their money to the government on unfavorable terms through outright deception, as foreigners have wised up and are pulling back!
Cramer knows that most Americans don't understand bonds and how their prices move in relationship to interest rates. You're being sold a bill of goods - again - just as you were back in 2000. Let's recap that one (again) - the list of companies that he told you to buy on 2/29/2000, almost exactly one month before the entire Nasdaq market blew up in his face:
OK. Here goes. Write them down -- no handouts here!: 724 Solutions (SVNX Quote), Ariba (ARBA Quote), Digital Island (ISLD Quote), Exodus (EXDS Quote), InfoSpace.com (INSP Quote), Inktomi (INKT Quote), Mercury Interactive (MERQ Quote), Sonera (SNRA Quote), VeriSign (VRSN Quote) and Veritas Software (VRTS Quote).
We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over -- and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don't even have earnings per share, so we won't have to be constrained by that methodology for quarters to come.
Oh, this is what he said in the closing of that article:
A-ha, that just leaves us with tech. That's why we keep coming back to it. That's why, despite the 80% increase in the Nasdaq last year, we are looking at another record year now. It is by that process of elimination that I have picked my top 10. And my next 10 and my next 10 after. Only those companies are worth owning.
The record is what it is on Cramer: It was in 2000 (go look up how many of those firms in his "recommended list" are still in business!) and it was when he told people to buy Downey in April of 2007 because "its a takeover target" with a $110 price target (from $67.) But Downey wasn't taken over - it collapsed under the weight of liar loans written on property in California, exactly as I (and others) predicted they would. Never mind his recommendation on the very same program to buy IndyMac, Impac, Lehman and Bear Stearns, all of which are gone!
Guess what - you're the fool being set up to get screwed - again.
Just like Greenspan's comments about ARMs at a secular low interest rate.
The carnies of Wall Street and its captive media (and you can bet The Government isn't far behind 'em) are trying to fleece you yet again.
Don't fall for it; the correct solution to the near-zero CD rates is to instead demand that the insane spending and bailouts stop so that CD rates go back where they make sense - that is, up around that same 4-5% range for reasonable (e.g. 2-3 year) durations, instead of you taking on extreme levels of interest-rate risk with a government that has a pathological addiction to spending more than it makes.
Cramer doesn’t want to be taken to the woodshed again by Obama and his surrogates at GE and “the Daily Show” so he’s going to be the good little boy and tout the soundness of government.
Just buy some physical silver and gold bullion and coins.
You will come out much farther ahead than owning worthless Treasury bonds.
Cramer is taking undeserved credit for the ideal, many have been talking about R Bonds for months.
Cramer is a special kind of stupid.
So true. Anyone who takes his advice deserves to lose capital.
Cramer is an over-exposed dope who has just shot his wad...buh bye....
I often said following his advice would have you living in the street.
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