Market Pulse

Defense is Your Best Offense

In any sports, whenever a finals is play by two extremes teams (the best offensive team playing the best defensive team in the league), defense will always be triumphant in the end; hence, defense is your best offense. We have two obvious examples in NFL: the ‘01 Ravens and the ‘03 Buccaneers. Today, we witnessed the victorious defensive Piston claiming the NBA trophy by defeating the best offensive team Lakers in game 5.

Similarly in the stock market, playing the best defense will provide the best returns. With stocks, bonds, real estates and commodities all inflated in 2003, a rare occurrence, and some, such as real estates and core materials, continue to inflate in 2004, the investment climate is becoming hard to generate solid risk-free income. Playing first-class defense maybe the only available instrument left guaranteeing positive returns in the future. Defense means going back to the basic interest compounding strategy with Treasuries. Since we all know the Fed is about to gas its short rates, the only safe Treasuries in the raising rate environment is short-term T-notes, 3 or less years maturity. While raising short rates will lower the face value of T-notes, the goal is to hold the notes till the matured date and earn the interests. In order to success on compounding strategy, you need to keep re-investing the interests and purchase more T-notes in succession.

I, probably the only person in the world, still believe in the possibility of the Fed lowering the short rate below 1% in 2006, after a couple of rises from now to 2005. In this case, lowering the rate below 1% will increase the value of T-notes in addition to the interests earned. The rule of the game is to purchase T-notes at least twice a year and keep doing it for at least 3 years. After 3 years of interest accumulations, you are likely to have more money than investing in other asset classes -- stock markets will be much lower 3 years from now; real estates will stagnate this year and begin to depreciate in 2004 and on; most commodities will be lower than today’s price.

This is the only safe investment advice I can dispense short of holding cash.

posted by jason @ 2:51 AM