I agree with you that buying T-Bonds in an escalating interest rate environment exposes an investor to significant asset erosion risk and many financial advisers caution savers to stay away from T-Bonds in this environment.

Many years ago I embarked upon an initiative to develop a T-Bond Portfolio Management Program that would out-perform the stock market and do so at a low correlation to the stock market. I believed such a program would be an attractive diversification vehicle for inclusion in a balance investment portfolio. I began implementing the program on 1/30/10 when my neighbor and I organized Howards' Hog Fund, LLC. Since then it has gained slightly more than 2.0% per month.

I mentioned this to Tim a few days ago.

The following are some of my thoughts that went into the development of the program followed by a brief summary of the two-part program:

Supporting Theories for a T-Bond Portfolio Management Program

“Experience will answer a question and a question comes from theory. The theory in hand need not be elaborate. It may be only a hunch or a statement of principles. It may turn out to be a wrong hunch.

“Experience alone, without theory, teaches management nothing about what to do to improve quality and competitive position nor how to do it.” W. Edwards Demming, PhD

Theory # 1: There are three ways to make money, namely: sell your time, get someone else to work for you or have money work for you.

Theory # 2: Having money work is the most effective of the three ways.

Theory # 3: When one attempts to make money with money, great caution must be exercised to control risk or the money will be lost.

Theory # 4: Investment portfolios are established for the purpose of making money and preserving assets.

Theory # 5: A low risk investment program needs to be built around something constant and dependable.

Theory # 6: The only dependable constant I have been able to identify in the market place is the fact that time passes. It is impossible to predict market direction or the magnitude of a market movement. The events of 9/11 showed that “the markets being open” is not even a constant. Sometimes the markets are closed.

Theory # 7: A money management program can be built around this dependable constant of “time passing” by owning an asset that pays a dividend and/or by selling a decaying asset. The financial success of insurance companies is linked to the principal of “selling a decaying asset” in the form of insurance policies.

Theory # 8: The safest assets in the world to own from which to collect interest are US Treasury Bonds, US Treasury Notes and US Treasury Bills because they are backed by the full faith and credit of the U.S. Government. As long as we have a government, the interest payments will be made and the principal will be repaid when due.

Theory # 9: Of these three instruments, 30-year Treasury Bonds generally pay the highest yield. They also have the greatest risk of principal erosion when interest rates go up because higher interest rates will drop the value of 30-year Treasury Bonds more than the shorter-term Treasury Notes or Treasury Bills. With interest rates at historically low levels, there is a high probability that interest rates will eventually go higher.

Theory # 10: Sophisticated hedging strategies utilizing futures and options on futures can be successfully employed to defend against asset erosion of the T-Bonds in an escalating interest rate environment.

Theory # 11: The returns on a 30-year Treasury Bond Portfolio can be enhanced by utilizing the constant of “time passing” by selling decaying asset in the form of Treasury Bond options.

Theory # 12: The returns on a T-Bond Portfolio can be further enhanced by fundamentally trading hog futures because of the unique nature of the hog market.

Theory # 13: In order to successfully enhance the yield on a T-Bond Portfolio, the following six skill sets must be developed:

1.� � � � Portfolio Construction
2.� � � � Portfolio Maintenance
3.� � � � Option Expiration Management
4.� � � � Portfolio Sizing and Risk Control
5.� � � � A deep understanding of hog production and marketing.
6.� � � � Emotional Control

Theory # 14: These skills are learnable/teachable skills.

Theory # 15: By employing these skills, it is postulated that the following two-part T-Bond Portfolio Management Program will be profitable when the market advances, when the market declines or when the market wanders aimlessly without any sense of direction:

. T-Bond Portfolio Management Program

Part 1. 30-year US Treasury Bonds are bought because of their safety and their interest rate is generally higher than other government debt instruments. There is risk that the asset value of the T-Bonds will erode away when interest rates go up. This risk of asset erosion will be hedged with futures and options on futures.

Part 2. The yield on the T-Bond portfolio will be enhanced by using a two pronged approach of trading hog futures based on the abundance of fundamental data available from the U.S.D.A. and by using sophisticated option strategies to harvest T-Bond option premium.

Best wishes,

dhm