It’s Only A Matter Of Time

When will the Fed raise rates?  That will be the question of 2010.  We’ve seen Australia raise rates in the last few months.  On Thursday, China raised interest rates as well.  Will Bernanke join in the fun?  While it’s important when the Open Market Committee raise rates, investors need to be focusing on long-term rates.  Remember, the Fed doesn’t control long-term rates.  They change short-term rates which affects your CDs, money markets, etc.  Don’t get me wrong, they definitely influence long-term rates, but they don’t directly control them like they do short-term rates.  How do they influence long-term rates?  By purchasing and selling bonds.  When they purchase mortgage bonds and treasuries in mass quantities, long-term rates fall.  In 2010, I believe they will dramatically slow this process.  Hence, uncapping the lid on interest rates.  The idea is to let rates rise slowly without making a big to do and announcing it like they would do with short-term rates.  But, that rise in rates will negatively affect your mutual funds, bonds, many of the stocks you own, and perhaps the economy.  Obviously it depends on how high rates go and how fast they get there.  The Fed may try to let rates rise in a methodical way but with all the stimulus they’ve created and as long as it’s been in the system, it could be like a slingshot causing rates to spike fast and violent.

Many of you have already positioned yourself to take advantage of higher rates by owning various assets including the Proshares Ultrashort Lehman 20+ Treasury ETF (TBT).  Since October, it’s up about 20% (it is positively correlated with interest rates).  You’ll hear in the media that because everyone thinks rates will rise, maybe they won’t.  Perhaps they won’t in the next couple of weeks, but I’m confident they will rise in 2010.  Therefore, I’m and advocate of reducing exposure to longer-term bonds, especially long-term treasuries and re-allocating to bonds that benefit from a rise in rates and ETFs that benefit from that rise as well.

You may be asking why wouldn’t the Fed just start raising rates now if the economy continues to improve.  Never forget there are political ramifications for raising and lowering rates when an election is approaching.

Therefore, watch what the Fed is doing and not what they are saying.  In addition, watch what the market is telling you about rates.  Be patient on these rising rates investments.  They will be longer-term trades.


12 Responses to “It’s Only A Matter Of Time”

  1. 1 Stephen January 7, 2010 at 10:56 am

    Hi Karl,

    I missed your daily market analysis on Bizradio. Do you believe the market will retest its low in 2009 due rate increase and the big boys selling and when? Do you still have the video newsletter? What is the best way to follow your analysis? Take care and best of luck.

    • 2 keggerss January 7, 2010 at 11:03 am

      Stephen. Thanks for following me. I did discontinue my video newsletter and will decide whether to start a new one over the next few weeks and months. The best way to follow my analysis is through & twitter for now.

      I don’t think the market will re-test its lows of 2009. I think it’s highly possible to have a real correction sometime in 2010 (meaning more than 15%). With that said, the economy is still improving, rates are still low, and there is simply no supply of stocks (meaning no selling pressure). So, it’s difficult to be too bearish. I would say to continue to have a long bias but have an exit strategy for pretty much everything. A sell off early in 2010 is highly possible as those people that were trying to postpone the capital gains tax may now do it with the calendar switching to a new year.

  2. 3 m.a. pendino January 7, 2010 at 3:28 pm

    I picked up your water report and drew charts for all the stocks. They look pretty, but i still don’t know what to do with them. How do you feel about continuing to invest in water? Hope you are doing well.

    • 4 keggerss January 8, 2010 at 8:03 am

      that water report I report literally about 3-4 years ago so that data is really old. I would like to update it and re-publish because the facts are still true and the opportunities are still there.

  3. 5 Sanjiv Patel January 7, 2010 at 6:56 pm

    Hi Karl, Its nice to here from you again. I really miss your radio show in the morning. If you do decide to restart your Video Newsletter, please let me know. I was a subscriber and would like to do it again. As you had pointed in the News Letter the negative divergence for S&P, I am seeing a breakout towards positive side. Am I reading it correctly? Also, would it be better to buy TMV instead of TBT to short treasury?

  4. 6 David in Dallas January 7, 2010 at 7:24 pm


    Do you still like the Sugar trade? It really seems to be breaking out.

  5. 7 john kelling January 8, 2010 at 1:08 pm

    do you like sgg?

  6. 9 Tom January 11, 2010 at 9:41 am

    Karl, is it just me or are people getting a little to over confident right now. You have the VIX at the lowest levels in a long time, 17.15 this morning. Also, investment advisors are least bearish they have been in 5 years. And every advisor I see on CNBC gets on TV saying we are going higher from here.

    • 10 keggerss January 11, 2010 at 10:07 am


      They definitely appear to be confident. However, in a really good bull market, remember that the overconfident people are the right ones and the bears are the incorrect ones. With that said, that means you are free to invest from the long side but continue to have an exit strategy whether its price stops or conditional stops.

  7. 11 john kelling January 11, 2010 at 4:49 pm

    what is premuim service? I miss your possitive comments. You are no afraid saying, “I don’t know”.

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