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Politics : Formerly About Advanced Micro Devices

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To: steve harris who wrote (212023)	11/18/2004 7:02:32 PM
From: tejek	Read Replies (1) of 1585090

Thanks Mr. Bush! When the Bond Market Talks, Listen By Doug Kass Street Insight Contributor 11/18/2004 3:00 PM EST While I recognize that capturing a turn in the economy is never an easy task, I once again have to go against the consensus -- and this one might be more important than my usual contrarian forays. From my perch, economic and corporate profit projections are simply too high. And future expectations for the course of intermediate-to-longer-term interest rates (which are generally expected to rise) might also be misplaced. I had thought that, despite a contrarian and negative view of the economy as we move into 2005, a collapse in the price of crude oil (which has occurred) would have been viewed in the very short term as economically simulative and would hit fixed income prices and raise yields. So, I shorted the iShares Lehman 20+ Year Treasury Bond Fund (TLT:Amex - commentary - research). I was wrong -- despite the renewed and added evidence of inflationary pressures -- and I have materially reduced my TLT short as my expectation has been unfulfilled. Why the Yield Curve Signals Slower Economic Growth This morning I would like to discuss the implications of the current term structure of interest, also known as the yield curve, and why it is signaling slower economic growth. While the stock market has had a rather mediocre forecasting record (having predicted 12 of the last three recessions!), the yield curve is the closest thing to a crystal ball that economic prognosticators have. One common misperception about monetary policy is that the Federal Reserve controls all interest rates. The Fed only controls short-term interest rates, via the federal funds rate; market participants influence all other interest rates. The shape of the yield curve has served to effectively forecast turning points in both the economy and the capital markets for decades. With the exception of 1966, an inverted yield curve has correctly predicted every economic downturn in the last 45 years. There are four types of yield curves: normal (example: December 1984), steep (example: April 1992), inverted (example: August 1981) and flat or humped (example: April 1989). Each shape tells us something about prospective economic growth and future stock market performance. A positively sloping or steepening yield curve typically is consistent with accommodative Fed policy and economic prosperity. And it usually produces an equity market that evokes positive investment returns over time. A flattening or negatively sloping yield curve typically is consistent with restrictive Federal Reserve policy and slowing economic growth. And it usually produces a headwind to equity market returns. continued......... thestreet.com

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