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Strategies & Market Trends : Drillbits & Bottlerockets -- Ignore unavailable to you. Want to Upgrade?

To: Diana who wrote (11551)	5/16/2001 9:17:44 AM
From: Augustus Gloop	Read Replies (1) \| Respond to of 15481

<<We have a tendency in this country to react to disasters rather than act on potential problems. I'd say we have all the reason in the world to ACT on this situation. I'm sick and tired of dealing with issues only when they explode in our face.>> Just so my post doesn't get taken out of context here was the complete thought. The article was interesting yet I think maybe a little harsh. True, two of the largest downfalls (market drops) happened under his watch and yes I think there were some serious mistakes made. But I would stop short of saying "[Greenspan] is a national disgrace and the most disastrous Fed Chairman in U. S. history." I want to believe that much like we investors the fed just made some bad calls. The problem with my line of thinking is when the fed makes a bad call our fate as investors is sealed. That said I really want to believe he was doing what he thought best for the country and its economy. Give me another day or so though as I'm sure I'll be back in "blame the fed mode."

To: Diana who wrote (11551)	5/16/2001 10:51:03 AM
From: MulhollandDrive	Read Replies (1) \| Respond to of 15481

Hi Diana, Thanks for posting that article, I know there aren't many bond geeks on this thread but it pays to watch and react... I agree with your article that the FED has been behind the curve wrt the bond market....All the government "debt" hawks should take note. invertedyieldcurve.com Here's a little bond market 101. Published Monday, December 4, 2000 Inverted Yield Curve An Oddity by Stephen Butler This has been quite a year for statistical oddities. Internet stocks are swinging in either direction by 90 percent and a presidential election is decided by a few hundred dimpled ballots. Now there's another quirky event: we are currently experiencing an economic phenomenon known as the "Inverted Yield Curve." Your reaction to this might be as if a bird-watching friend had breathlessly announced sighting a red-billed double-crested humdinger. You are happy for your friend, but you can't see that this has much impact on your life. Think again. An inverted yield curve has important implications for your financial health and retirement planning. So let's investigate what Sherlock Holmes and Dr. Watson might have called "the strange and mysterious case of the inverted yield curve." A yield curve is a standard measurement of the bond market. It shows on a graph the rate of interest being paid compared to maturity (the length of time before a bond re-pays principal). The usual circumstance is for a yield curve to slope upward, which is called a positive curve. That simply means investors expect to get paid a higher rate of interest as the time to maturity increases, and a lower rate for less time. The person borrowing the money (i.e., selling the bond) has to reward the buyer for assuming more risk over a longer period of time. For example, if you lock up your money in a five-year CD, you expect the bank to pay you a higher interest rate than if you put the same amount of money in a six-month CD. That's what makes the current circumstance so noteworthy. The yield curve is sloping downward, which is called a negative or inverted curve. This means that your money market fund, which is invested in short-term debt and which carries virtually no risk, is paying a higher rate of interest than long-term bonds. Money funds are paying about 6.3 percent today while five year bonds are paying 5.5 percent. An inverted yield curve should concern us, because historically it has been a forward indicator of a declining stock market. Interest rates are the single most important influence on stock market values. When rates go up, it costs companies more to borrow the money they need to operate. This additional interest cost cuts into profits and eventually translates into lower stock prices. What's causing the yield curve to behave so strangely? It seems to be a case of supply and demand. Awash in cash, the U.S. government is paying off its debt rapidly. It is not issuing as many long term bonds as it did during the deficit years. Supply is drying up. A government surplus is a good thing. Yet a serious question arises about whether the financial markets can function smoothly without the tool of government bonds. What else will allow money to be loaned and invested over long periods with predictable and guaranteed rates of return? Meanwhile, demand for bonds is surging among institutions and individuals. After a year of flat or negative stock market returns, big and small investors are searching for safety. Money market funds at 6.3 percent suddenly look attractive. If you think that the economy is slowing down, then you might assume that long-term yields will drop still further pretty soon, and today's long-term bond rates may be the best investment alternative for the next 10 years. The professionals seem to be keeping their powder dry. Cash positions at equity mutual funds are high today as managers wait to see what will happen. Look at this another way. Businesses that are borrowing don't want to borrow long term at today's rates if they are convinced that tomorrow's long-term rates will be even lower. The demand for short term debt is greater than the supply of investors who want to loan short term. Therefore, you have to pay higher interest rates to get this suddenly-precious short term money into your business. Remember, the stock market is dwarfed in size by the bond market. The engine that drives the bond market is the question of present and future interest rates. Because interest rates in the bond market are the single most powerful determinant of future stock values, rate gyrations can offer a clearer picture of the future than the stock market, with all of its surrounding hype. What does it mean as we struggle to make sense of our retirement plan investment mix? In some ways, an inverted yield curve confirms what we already know. The stock market is volatile and will have to correct sooner or later if it is to revert to the norm. As a signal, today's inverted yield curve may be the bond market's equivalent of the stock market's grossly inflated price earnings ratio. Two ways to deal with risk are to a) ignore it or b) reduce short-term volatility by moving into bonds and cash. For those with a long-term financial goal, Plan A may be the best bet. Hold on to your stocks, prepare for some gut-wrenching twists and turns, and wait for clearer days ahead. For those with a shorter-term goal, or whose stomach churns uncomfortably on a roller coaster, a version of Plan B may be worth considering. At the very least, you should expand your perspective beyond Nasdaq, the S&P 500 and the Dow, and develop an appreciation for interest rates and yield curves. Whether or not you choose to have bonds in your portfolio, a comprehension of their basics will make you a far better and more resilient investor.