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Non-Tech : Elaine Garzarelli
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To: Gil Kempenich who wrote (97)11/20/1996 4:33:00 PM
From: Andy Nemo   of 292
 
Gil,Mark. We're sitting on a time bomb. I think the bull will continue to run as long as the yields are down. And I think probably we'll get the long bond down to the range 6.00-6.10. That should take the market considerably higher to say 6700-6800.

But then the clock starts to tick. IF we don't have any downside potential on the yield, we'll have no upside potential on stocks because we'll probably will see lousy earnings for at least the next two quarters (Today trade balance deficit increased by 10% to 10.4 bln USD in October. Indicating low exports but also slow imports - low consumer spendings.)

The ticking bomb today is all the people that have borrowed money with short-term debt in Japan (close to zero interest rates) and bought high yielding US bonds. And since the Yen has been weak you get high yields at the same time as you get a positive currency effect. And here we're talking a LOT OF DOLLARS tied up in this type of scheme.

Now: You now get stronger numbers from Japan at the same time as the US economy is slowing. This could easily lead to a weaker USD and a stronger Yen. And then what will happen. People will start liquidating these positions fast. And it's a small door. If everybody is running in the same direction at once. The yield has to get up. This is pretty much what happened in 94,when the Yen strengthed and US bond rose by almost 2%.

But then the market was not as high as today. Any upward pressure in the yields will make the market either collapse or turn seriously bearish.

And soon the clock will start ticking ...

I think most people ignore the bigger picture here, that seriously could mess up this bullish market we have here. When you get down to 6% yield, there are little room for positive surprises. And when things start to go wrong everything starts to go wrong.

Just some thougths that may be or not be true. Comments anyone?

Andy
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