Hi Ike,..Re:markets will realise that real interest rates are
too high and hence we need a cut in interest rates on the short
end
I know you think that the real interest rates are too high and
that strong economic numbers can be offset by lower import prices
and commodity prices; however, I think the economy is stronger
than many think. Just today, for instance, we had a record number
for existing home sales, the most interest rate sensitive part of
our economy. We have also had many months of strong new home
sales and construction spending. On top of that, we have good
capital spending and very tight labor and we, the consumer,
continue to spend with enthusiasm because low gas and oil prices
along with low costs imported items are like a big tax cut. Add to this the gains from a healthy market over the past few years and the
consumer spending portion of the GDP, 68%, and it will be apparent
that underlying strength continues.
AG has managed to prolong these extraordinary economic
conditions for the past few years by sometimes letting the
market lead the direction. Only now the market is distorted
because of 'flight to safety' buying as well as buying to hedge
mortgage back securities investments decreasing spreads, so
current rates don't reflect the actual strength of the economy.
When global markets stabilize somewhat and it becomes apparent
that US earnings are mostly safe and stable, the bond market will again focus on US economic fundamentals. If global news calms down
in the next few weeks and we don't get as many earnings warnings,
rates will try to move back up as they were doing 2 weeks ago. Given this time frame, you might want to look at the Dec Bond. Maybe selling Oct or Nov calls and buying puts. I agree that rationalization will occur, just for safety would look at the further out options. JMHO
Regards,
Lee |
