What a weekend! We have at least two feet of snow, the college basketball has been great and a neighbor plowed my driveway yesterday with his snow-cat-looking vehicle (too bad it snowed another foot since he came by!).
In doing my usual weekend reading it seemed like fear of all of the topical bad things seems to be growing. If I am reading these tea leaves correctly maybe we can see a little rally in the next few weeks. This is more of a contrarian thought than anything else.
I do think the market looks to be in rough shape, not crash-rough just decline-rough, but the market although shaky has not cracked. I have written many times that I don't feel the need to outguess big declines. The number of times the market has shot up, out of the blue for no reason at all is a lot. I do not want to miss one of those rallies.
This is more about philosophy than anything else. A lot of people do try to time these types of moves. I view that type of trading as one of my weaknesses so I tend to avoid it. I also don't think it is appropriate with respect to managing other peoples money, but that is just my opinion and not a condemnation of anyone that does it.
The recent flattening of the yield curve has been interesting to me. The bond market is pricing something in and I'm not sure what. I don't know that the inversion, such as it was, was long enough or steep enough to be automatically recessionary. That probably does not matter because the economic cycle is fairly long in the tooth and like to end soon, inverted curve or not.
That the curve flattened (before the inversion) is historical evidence that the economy is slowing down.
One last question, does it seem to you like the number of people that a month ago were saying the inverted curve won't matter have stopped talking? Maybe it's just me.
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2 comments:
Aside from saying the inverted yield curve wouldn't matter, they were also very early in calling it inverted when it had barely happened 12/27/05, and only by the measure of the 2yr/10yr. The Fed Funds rate or 3mo., whichever you like to use, is still lower than the longer rates so the truly inverted curve has yet to happen.
As with the talking heads' fascination with the real estate bubble, the inverted yield curve now gives them, and they are dying to report, a catastrophe before it happens since they completely missed the stock market bubble from 2000.
In his November 16, 2005 investment journal, "Basic Points," Donald G. M. Coxe provides a pretty plausible explanation for the current state of the yield curve, the US market's resistance to exogenous shocks, and the upward but rather boring returns of the S&P. Among other things he notes that, ex oil, earnings growth in the S&P have actually been a fairly low 11% and this trend along with rather low volatility is likely to continue well into 2006. The upshot being that returns in commodities and outside the US continue to look more favorable albeit likely more volatile. -RW
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"...we believe the world is experiencing the third global currency regime of the postwar era: the first was Bretton Woods (1944); next was the Plaza Agreement (1985), which was amended and altered by the Louvre Agreement (1987) and the Tokyo Accord (1995) without seriously altering the dollar's role as sole global reserve currency.
The Beijing-Tokyo Entente ties the Renminbi and Yen together in their relationship to the dollar, thereby tying three of the world's four major currencies together in an undeclared, yet empirically observable, relationship. Last month was the Fifth Anniversary of this Pacific Basin deal that pacified the unruly markets at the time of the collapse of Long-Term Capital Management and the Russian Default ...Its most important result has been the support of the dollar that eased the rate of dollar decline in 2002 and eventually stopped it in 2004. That process of forex intervention has meant that the Chinese and Japanese have bought perhaps $1 trillion in Treasurys, US Agencies and Eurodollars. Their purchases have tended to be concentrated at the front end of the Treasury curve.
The "belly" of the curve has been getting support from a new set of buyers—OPEC. A return to the recycling into the US and Eurodollar market of excess petrodollars has been a welcome event for the US bond market. We understand that most of this buying is done not through the New York Fed, but through the London bond market, for political reasons. ...
The long end of the Treasury market is primarily the preserve of pension funds and hedge funds, although foreign central banks have recently been active in auctions of the Ten-Year Note. Pension funds (domestic and foreign) have been extending duration in their bondholdings and they have been buyers of ten-years, "thirty years," and long zeros. ...
It is the strong performance of the long end that has occasioned the most anguish for Greenspan, pension fund trustees, and for bond managers measured against the leading indices, and the most delight for homeowners and homebuyers. Despite a quadrupling of the Fed funds rate, yields on the Ten-Year Note have declined. As we have written previously, this is, we believe, largely because of the appearance of a new kind of bond liquidity that we call Synthetic Liquidity. Hedge funds used to borrow in Eurodollars, with the rate being tied, of course, to the Fed funds rate. They would then buy the Ten-Year Note, on what has long been known as "The Carry Trade." Greenspan and most other market participants assumed that once the Fed funds rate had climbed above 2.5% or so, the hedge funds, driving the yield on the Ten-Year to 5.5% or so, then the hedge funds would find other playgrounds.
Instead, they just shifted their borrowing to cheaper eurocurrencies and hedged their currency risk (at modest cost), and kept buying the long bonds. When the Ten-Year Note defied gravity ...some other buyers decided to re-enter the long end of the Treasury market. At this week's auction, foreign central banks bought more than half the Ten-Years on offer, their highest participation rate in many years.
When there is such massive inflow of liquidity across the curve in the Treasury market, it naturally spills over into the mortgage-backed sector, the corporates, and into junk. It is the bond equivalent of the Lake Pontchartrain effect, except that for bonds—and borrowers—this flooding process is nothing but good news.
It is, of course, also good news for the stock market. ...[the question being can it be expected to continue indefinitely]
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