MARTIN J. W HITMAN

 

From Marty Whitman of Third Avenue (Q3 commentary), hot off the press. He has a lot of negative things to say about USTs in this one. Enjoy!

 

For market participants seeking satisfactory returns in mid- 2012 it seems no longer possible to do so as a cash return investor. Interest rates are just too low. Rather the market participant has to focus on being a total return investor, i.e., income plus capital gains. The futility of being a cash return investor is demonstrated by holding a 2% 10-year Treasury note priced at par. The investment is almost a sure loser. No credit instrument ever achieves a market price much above its call price, no matter how much interest rates go down, so it is hard to foresee meaningful capital appreciation for the Treasury Note. If interest rates go up (seems a reasonable possibility from 2%), the market prices of the Treasury Note will decline. This dire position is ameliorated if the portfolio hholding the Treasury Note is continually getting new funds to invest and reinvest so, over the long term the portfolio becomes a dollar averager. Nonetheless, insofar as is feasible given constraints imposed legally and by “prudent-man” rules, a diminished portion of these portfolios in mid-2012 ought to be invested in investment grade credit instruments and an increasing portion ought to be invested in high quality total return securities.

TAF 3Q 2012 Report and Shareholder Letters