Tuesday, December 19, 2006

Keeping It Interesting

Some lines from a film never go forth your mind; I don't retrieve the linguistic context always, but I make recollection the dialog. "The Big Chill" is one of the few movies I have (VHS). At dinner, William Hurt, Jeff Goldbloom, and Uncle Tom Berenger reason about their past like domestic dogs growling for a Meleagris gallopavo leg at Thanksgiving. JoBeth William Carlos Williams conveys unagitated by chastising the men, and to that Injury answers with a smirk, "Just trying to maintain the conversation lively." It's one of those "had to be there" moments.

Bond bargainers "keep the conversation lively" . Rich Person you noticed that long-term rates have got got fallen while short-term rates have risen? Low long-term rates maintain the lodging market active (a positive, maybe), with the inexplicit suggestion of a slowing economic system (a driblet in long-term borrowing by corps suggests a slow down in the economy). All of this is happening as the Federal Soldier Modesty torsions rates higher!

An interest rate anomaly happens when short-term rates get close to exceeding long-term rates. This is known as an "inverted output curve". Inverted output curved shapes preceded the past five recessions. "Something strange have been going on in the chemical bond market", composes E.S. John M. Browning (Wall Street Journal, May 31, 2005). Markets get long-term trends right, usually.

Low interest rates urge positive stock returns; however, market volatility looks to withstand such as optimism. One twenty-four hours pillory are up, and the adjacent down. Person said, "When interest rates are low equities grow." Many stock analysts get slap-happy moments with low interest rates. Optimism makes not travel markets; pessimism does. John M. Browning wisely detects "...the predominant position in the stock market is one of celebration..." when it ought to be fear. (WSJ, May 31, 2005)

Some economical experts make anticipate deterioration economic conditions. "Over the past 35 years, the sceptics say, Federal rate additions have got tended to stop with trouble." (WSJ, May 31, 2005) Most recently, the bubble chewing chewing gum stock market popped during 2000 left pillory looking like pinkish bubble gum on a child's cheeks.

No simple declaration maintains investors from the dangers of an upside-down output curve. Every analyst, economist, and initiate have an opinion. What matters is the reaction of the chemical bond market, and the current short and long-term yields are "keeping it interesting".

My point? There is no manner to foretell every plus social class move (up or down). Broad variegation within the chemical bond existence supplies aggregative benefit to your portfolio. This makes not intend owning every conceivable bond; it makes average integrating chemical chemical chemical bond management consistent to attain your ends within the linguistic context of your hazard tolerance.

* These are the major bond (fixed income)asset social classes U.S. Government

* International Fixed Income

* Municipals (tax efficient accounts)

* High Yield

* Emerging Market Debt

"When a thing discontinues to be a topic of controversy, it discontinues to be a topic of interest." - William Hazlitt, English Language litterateur (1778 - 1830)

1 Comments:

Blogger Eric B said...

In 1996, authors Estrella and Mishkin released a famous Fed study that developed a probability table about how likely a recession would be 4 quarters later, given a particular level of the yield curve spread. Their study accurately predicted the stock market crash in 2001 when the yield curve was inverted one year earlier.

The last few months, the spread between the 3-month & 10-year bonds has been -0.40% indicating a ~40% chance of a recession.

Every time a bearish set of economic data was released in late 2006, the stock market shrugged it off since it heightened expectations of a Fed rate cut in 2007 (which stimulates growth). On the other hand, when positive data was released, the market still rallied. Thus, the stock market was going to rally no matter what the news!!!

This year should be different due to (a dirty word for investors) STAGFLATION. Yesterday’s Fed minutes indicated the presence of this double whammy: slowing growth AND rising inflation. These 2 phenomena rarely work in opposition. What this means is that the economy is slowing, but the Fed is unlikely to cut rates as long as inflation is an issue. This is very bad for the stock market and, to a lesser extent, the bond market.

1:05 PM  

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